1. Select 3 countries, from at least two continents.
2. Begin research at the Bank of International Settlement to locate the website for the Central Banks of each of your three countries. www.bis.org tab “Central Bank Hub”. Each country’s Central Bank should be the primary data source for this Part 1 of the Case Study Project.
3. Calculate the cross-rates from these three Exchange Rates.
4. Calculate the 3 month Forward Exchanges for each currency in relationship to the other two currencies using Interest Rate Parity Theory.
5. Take a closer look at the notion of “Real Interest” by estimating the Forward Exchanges using the relative inflation rates among the three countries.
Interest Rates are forward conditioning
iI(CND)/i(US) = (r+P*/P(CND))/(r+P*/P((S))
Therefore CND/USD =I(CND)/I(US) = (P*/P(CND))/(P*/P(USD))
6. Summarize from your various calculations the general trend forecasted in the relative exchange rates, interest rates and inflation.
Case Study Part 1 (15%):
Each student will be responsible for preparing an exchange rate report for three countries (relative to each other). You will need to obtain quotes on October 25th for the closing spot rates, three month forward rates, three month treasury (risk free rate) and most recent consumer price index for all three countries. Each report should indication your expectations of future exchange rate values based on interest rate parity and purchasing power parity, and contract these forecasts with the actual spot and forward rates current in the market. You should also calculate the cross rates based on both the spot and forward rate quotes; as well as examine the relative exchange rate movements over the last 10 years.
Reports should be a maximum of 1000 words and include tabled and graphed data. Due in D2L Dropbox on October 30th .
Additional secondary data sources that could be referenced in addition to the Central Banks include:
www.oanda.com
www.bloomberg.com
If you try using a Forward Exchange Rate Calculator (rather than published quoted forward rates) you may contrast their forecast results with your own calculation. Discuss the differences between the calculator and your calculation and what variables could be responsible for the difference in forecast.
