Objective:
In this assignment, you are required to evaluate the relationships between interest rates and
exchange rates before and after the outbreak of the COVID pandemic for a given country.
Target country:
In the table below, use one of the assigned countries whose sequence number matches the last
digit of your student identification number.
Country Sequence Number Currency
Canada 1 CAD
Czech Republic 2 CZK
Hungary 3 HUF
Israel 4 ILS
Korea 5 KRW
Mexico 6 MXN
New Zealand 7 NZD
Norway 8 NOK
Poland 9 PLN
United Kingdom 0 GBP
Instructions:
Download the accompanying Excel sheet, which contains three tables. Table 1 shows the
monthly exchange rates for selected OECD countries. Table 2 shows the interest rates for
selected OECD countries. Table 3 shows selected columns from US Money Stock Measures.
(1) Use Tables 1 and 2. Suppose you want to conduct a carry trade in Dec 2019 and close your
position in one year in Dec 2020 using the home currency of your target country and USD.
Assume that you would borrow 1 USD or 1 target currency in Dec 2019. Describe your carry
trade strategy, calculate the percentage profit/loss of the carry trade, and comment on your
strategy. (4 Marks)
(2) Plot exchange rates between the target currency and USD from Dec 2019 to Dec 2020 and
provide plausible explanations for the changes. (3 Marks)
(3) Use Tables 1 and 2 and estimate the target country currency/USD exchange rate for each
month from January 2020 to December 2020 using the interest parity model. Display the
following results in a single table in your answer with adequate explanations of your model
and calculations:
i). the monthly interest rate differentials
ii). the forecasted monthly exchange rates based on the interest parity model
iii). the absolute value of the difference between the actual and the forecasted exchange rates
for each month (forecast error = abs(forecasted value – actual value))
iv). the relative size of the forecast errors (i.e. error/actual foreign exchange rate)
v). the average of relative forecast errors (estimated in iv) over the sample period
Based on the above results, comment on the effectiveness of interest parity in predicting foreign
exchange rates. (5 Marks)
(4) Use Table 3 and describe the changes over the period. Search in Google Scholar/ProQuest
Central/Federal Reserve Bank publications for references and provide explanations of your
observations. (3 Marks)
(5) From the perspective of the US, apply the models of lecture 5 and forecast the influence of
your observations in question 4 on short-run US interest rates and USD/target exchange rates.
Please clearly state your assumptions and support your argument with appropriate
diagrammatic analyses. You are not expected to use actual data when answering this question.
(4 Marks)
(6) From the perspective of the target country, apply the models of lecture 5 and forecast the
influence of your observations in question 4 on short-run interest rates in the target
country and target/USD exchange rates. Please clearly state your assumptions. You are not
expected to use actual data when answering this question. (4 Marks)
(7) Please clearly explains your work with adequate references, clear structure, and
professional presentation. (2 Marks)
TOTAL MARK = 25
2
Other Requirements:
Include the name of your assigned country on the cover page. Include a cover/ title page
showing your student identification number. Do not include your name.
For the calculation questions, please round your answers to 3 decimal places.
Maximum length of assignment: 2000 words excluding cover/ title page, tables, graphs,
figures, reference list and appendix. Penalties for going over the word limit will be applied as
per faculty assessment policy.
The appendix section does not have a word limit.
Do NOT include executive summary, introduction or conclusion sections. These sections will
not be marked.
Formatting requirements: single line spacing, 2 cm margins and 11 point font size. Tables,
charts and figures should be clearly labelled.
Penalties apply for poorly presented work.
You must label your answers for each part of the tasks clearly. (e.g. Task 1, Task 2, a. b., etc.).
Referencing: You are expected to use academic references to support your analysis and
arguments. Citations and the reference list must be prepared following one of the University of
Sydney referencing and citation styles (https://libguides.library.usyd.edu.au/citation). It is ideal
to employ at least three references to justify your arguments.
Writing: The logic of the answers must be easy to follow. There are expected to be no spelling
or grammatical errors and terminology should be clearly defined.
Professional presentation is highly encouraged.
Submit ONE word document ONLY. This document should include the main body of the
report and complementary materials in the Appendix.
General Marking criteria
The criteria below will be followed when marking each part of the assignment:
1. The extent and quality of critical reasoning/critical thinking.
2. The demonstration of knowledge of relevant theory.
3. The successful usage and interpretation of relevant data.
4. The extent to which the work is clearly, concisely and professionally presented.
