FINC6013  International Business Finance

International Business Finance
Semester 1, 2021
Group Assignment
This is a group research project that must be completed and submitted as a group. Web-based checks
on plagiarism will be conducted on each group project.
Mark Allocation:
This project will be marked out of 30 and constitutes 30% of your overall grade.
The length of the project must NOT EXCEED 12 typed pages with double spacing, 12 points Times
New Roman, including executive summary and references but excluding appendix, if used. Appendices
must not exceed 5 pages. There will be a penalty of 1 mark per page for not meeting this requirement.
What’s included in the 12 page limit?
Executive summary
Assignment body
Reference list
What’s excluded from the 12 page limit?
Title (Cover) page
Table of contents
Due date:
The due date for the project is 5:00pm May 21
, 2021. A late penalty of 1 mark per day is applicable
(see penalty breakdown below).
Page 1 of 5Submission:
The only acceptable form of submission is electronic via the submission link in the unit’s Canvas
site. Hardcopy and email submissions will NOT be accepted. Late submissions will be penalized.
See below for penalty details. All submission will be checked through TURNITIN for similarity
with external sources.
The TURNITIN assignment submission box will close at 5:00pm on June 4
, 2021 (Closing date).
Submission format:
Each group can only submit ONE project report. Only ONE submission for each group is
permitted. It is imperative that your project report is submitted in ONE document. Only a PDF format
document will be accepted and it is your responsibility to ensure all pages correctly display your original
content. Missing or distorted figures and formulas will result in lower marks.
Cover page:
Ensure the Student Identification Number (SID) of EACH student is on the cover page of your
assignment. The name of student must NOT show up on the assignment to ensure the anonymous
marking requirement.
Document name:
Your project PDF file must be named in the following format:
FINC6013_Groupnumber_ 2021.PDF
There will be a penalty of 1 mark for incorrectly named projects.
List of references used and in-text citations must follow the Harvard referencing style
Pay particular attention to presentation. A significant component of your mark will be based on
presentation. Avoid overdoing formatting, and ensure that the assignment is very clear, logical, and
professional. Pay attention to grammar. Clear and logical presentation is a major challenge. Preparing
a concise report is another major challenge. Every part of the assignment should add to the end result
otherwise it is superfluous and distracting.
Late penalty:
A late submission will attract 0.5 mark per 6 hours (2 marks per calendar day).
Page 2 of 5Incorrect format penalties:
1 mark per page for exceeding the page limit.
1 mark penalty for inappropriate referencing and formatting.
1 mark penalty for a failure to follow the naming convention of the project.
While discussion and collaboration are expected, plagiarism is a breach of the University of Sydney
Code of Conduct and will be dealt with by the Faculty.
Be sure to acknowledge all of your source materials and provide proper citations for any quotes. Checks
for similar contents (web materials, other students’ projects, etc.) and plagiarism will be conducted by
TURNITIN and the projects with a similarity index significantly above an acceptable level will be
reported to the faculty and this may result in a zero mark being awarded for the project.
Page 3 of 5The uncovered interest parity and currency carry trades (30 Marks)
A currency carry trade involves investors looking to exploit interest rate differentials between two
currencies and it is thought to be one of the factors that contribute to the empirical violations of the
uncovered interest parity (UIP). Choose a pair of funding and investment currencies (you decide pairs
of currency on your own) and their money market interest rates (e.g., monthly rates, and ). Provide
detailed responses for each of the parts below.
1.1 Trend analysis (6 marks)
Document the trends of the exchange rate and two interest rates over the past 10 year period (or more)
using data at a monthly frequency. This should include a graphical analysis showing the movements of
each of the three series. In addition, provide commentaries (descriptions) of the salient points of the
trends, if any.
Ensure to use risk-free rates. A proxy for risk-free rate can be either short-term Treasury bill, or
Interbank rate. Since the investment horizon is one-month, it’s better to use short-term (1-month or 3-
month) maturity bond rate than long-term maturity bond rate (5-year or 10-year). These risk-free rate
proxies can be obtained from a central bank website of each country. The FRED
database of the Federal
Reserve Bank of St. Louis (see its link below) provide these data for some countries.
1.2 Deviations from the uncovered interest parity (6 marks)
If the UIP condition holds, the exchange rate that was predicted from the interest rate differential 30
days prior to today would equal to the currently observed exchange rate. If the UIP condition does not
hold, there would be deviations (i.e., differences) between the predicted exchange rate and actual
realized exchange rate. Present (1) time-series of the predicted and actual realized exchange rates in one
figure, and (2) time-series of the deviations between them in another figure. Identify the periods, if any,
where the UIP appears to have been significantly violated.
Since the UIP condition can be represented in different ways, deviations from the uncovered interest
rate parity can be represented in different ways as well. One form of deviation is a difference between
the forecasted and actual exchange rate, as discussed above. Another form is a difference between
percentage change in the exchange rate and interest rate differential. Present a scatter plot where the y
axis is an interest rate differential and the x-axis is percentage change in the exchange rate. Discuss
whether your data points lie on the 45-degree line through the origin.
1.3 Empirical testing of the UIP (6 marks)
Empirically test the validity of the UIP for the two currencies you have chosen. A regression analysis is
required and you can use Excel’s data analysis add-in or any of the statistical packages you have access
to. Be sure to (1) clearly identify the regression model, (2) the null hypothesis you are testing, and (3)
provide appropriate discussions on the results of the regression analysis.
Page 4 of 51.4 Profitabilities of carry trade strategies (6 marks)
Identify the periods of significant profitable carry trade opportunities that existed during your sample
and calculate the carry trade profits that would have resulted. Carry trade profits can be represented as
a dollar (or other currency) terms, assuming that investors invest a certain amount of money at the
beginning of the sample period.
Document the market conditions during these periods (e.g., measures of system stability – exchange
rate volatility, stock market volatility, etc.). Check newspaper reports (using Factiva via library’s web
access) to see whether actual carry trades during the identified periods have been reported.
In addition, identify the periods when carry trade strategies deliver significant negative returns. To what
extent market conditions differ from the period when carry trade strategies deliver positive returns?
The remaining 6 marks are allocated for presentation of report
Ensure to use academic reference (not solely web sources) to support your
Pay particular attention to presentation. Avoid overdoing formatting, and ensure that the
assignment is very clear, logical, and professional.
Clear and logical presentation is a major challenge in assignment preparation. Preparing a
concise assignment is another major challenge.
Information sources:
database of the Federal Reserve Bank of St. Louis:
Central bank web sites of relevant currencies (most provide relevant data for sufficient periods)
Web sites of international organizations – OECD, IMF, BIS, etc.
International Financial Statistics (On-line database available from Fisher Library’s web site)
Newswire and financial newspaper reports (accessible via Factiva database from Fisher
Library’s web site)
Other Web sources – market commentaries of FX and money market movements
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