Answer both parts of this assessment
Part 1 -
You work in the research department of a major global commercial bank. The bank's foreign exchange dealers have told you that they have some of the world's smartest investors among their client lists. You have been asked to write a report that proposes a strategy through which your bank might benefit from monitoring and responding to the actions of these customers.
In writing this report:
1. Explain and justify your strategy with use of appropriate academic and/or professional research.
2. Explain in as much detail as possible any statistical analysis that would need to be performed (if any) and detail any data that you would need to collect to make your strategy operational.
3. The bank's brand and reputation are highly valued by senior management. Discuss the possible implications of your strategy on the bank's reputation and how this might be managed.
Part 2 -
You are the Assistant to the Chief Investment Officer (CIO) of a large asset management firm with a broad range of retail and institutional clients. Your firm currently only offers products that invest in equities but the CIO is reviewing the case for offering products that view foreign exchange rates as an asset class. You have been asked, as part of this review, to write a paper discussing the extent to which the company can expect to be able to offer attractive investment products using major market exchange rates.
Guidance notes
- You can take any approach you like but your paper must be based on one or more topics from the course. You may, for example, choose to focus on the performance of specific classes of trading rules. Alternatively, you might survey the broader approach of using macroeconomic approaches to forecasting exchange rates. Or you can choose any other approach that you think might be of value. Simply define and justify the extent of your review at the start of the report. You should make a clear and well-justified recommendation.
- The person commissioning each of these reports is busy and does not have time to waste. As they value conciseness and completeness equally you should aim to include all the things you deem to be important and exclude anything that is not. If your report needs to be long because there is just so much stuff you need to include then fine. Similarly, if you feel you can cover what is needed in just a couple of pages then you can hand in a shorter piece of work. However, your managers (and the marker) may not agree, so this choice will affect your grade.
- If you really want a guideline then I would think you should be able to give good answers in around five pages per question. This is a guide, not a rule. Graphs, figures, tables and references are not included in this page count.
Topics Covered in module: International Finance
Week 1: The Foreign Exchange market
a. What is the foreign exchange market
b. FX markets and trading (spot, forwards, swaps)
c. FX market structure (dealer, client, voice broker, electorinc trading, multibank trading, dealer network)
d. Current state of the market- algorithmic trading, HFT trading
Week 2: Exchange rate regimes
a. Exchange rate regime 1 - fixed versus floating
b. Exchange rate regime 2
c. The trilemma- impossible trinity
Week 3: FX Arbritage
a. Covered interest rate parity an arbitrage
b. Evidencing FX arbitrage
c. Crisis Experience, recent experience and current state of arbitrage
Week 4: The Carry Trade
a. Uncovered interest parity
b. Carry trading
c. Performance and risks of the carry trade
d. Computing carry trade returns
Week 5: Fair Value modules
a. Taking value investing to exchange rates
b. Purchasing power parity: PPP-another arbitrage opportunity
c. Exchange rate forecasting
d. The Asset Approach
Week 6: Market Microstructure
a. Information and order flow- dealing desk transactions with various customer types Hot potato trading, profit from the bid/ask spread, price shading, dealer inventory and risk management, interbank order flow and exchange rates
b. Contemporanues correlation and the Meese and Rogoff forecasting test.