Currency Forecasting Project
You work on the currency trading desk of a large international investment bank. Your boss has asked you to forecast what the exchange rates (USD/AUD, EUR/AUD and GBP/AUD) are going to be on 04 May 2017. Your boss has stressed that you must use a number of different methodologies to forecast these rates and then you must combine the results of these methodologies into one summary forecast for each exchange rate.
As your boss is feeling generous, he has decided to let you speculate with AUD$100 million of the bank’s money to try and profit from your forecasts. He suggests that you try and make as much money as you can assuming that your forecasts are correct. Any profits will be split between you and the bank. You make money by changing your AUD into the foreign currencies now and then back again to AUD at the end of the period. In other words you will profit if you put some of your money into a foreign currency that appreciates against the AUD.
Your boss is a busy man so at most he wants to read 5 pages (1000 words) of information about your forecasts and trading strategy. This includes text and graphs. References should be included in the text or in footnotes. Your boss does not want to see a separate reference list and does not want to see any appendices. Your boss does not need you to define or introduce your methodologies, just apply them.
• The aim of this project is to use the knowledge you have acquired in International Finance (and other subjects) to forecast future exchange rates and to attempt to profit from these forecasts.
• This is to be completed individually.
• This project is worth 20% of your total grade. See Blackboard site for specific marking criteria.
• The project is due 6pm on the 4th of May. Projects are to be submitted via the Blackboard site.
In the currency forecasts section you are to forecast the spot rate for each currency (US Dollar, Euro and British Pound) relative to the Australian dollar for 12 months (from the day this project begins). You enter these forecasts only once and will not be able to revise them. In the trading strategy section, you have to allocate a percentage of your money into each currency to attempt to make money from your forecasts. You can allocate anywhere between 0% and 100% into a currency. Percentages must be positive and total 100%. For example, if you predict that the Australian dollar will depreciate relative to the US dollar over the period then you will make money by having some of your money in the US dollar.
You can forecast your future spot rates in any manner you wish. However, in a maximum of 5 pages you have to explain how you have come about these forecasts and how you plan to make money from these forecasts. Marks are awarded for forecasting methodology (number of methodologies), explanation of summary forecasts, consistency between forecasts and trading strategy. References should be added into the text or put in footnotes. No other appendices or extra pages are allowed. You do not need to explain formulas and methodologies, just apply them!
To complete the project, you will need the exchange rates when the project is due (ie 12 months before your forecasts). For simplicity, assuming these rates are:
USD/AUD: 0.76 USD per AUD
euro/AUD: 0.68 euro per AUD
GBP/AUD: 0.53 GBP per AUD
Fundamental forecast: Relative PPP (make sure that in the project, the inputs are future inflation)
Relative Economics Strength Approach (interest rates, giving a general sense of whether a currency is going to appreciate or depreciate and an overall feel for the strength of the movement.)
Technical forecast: repeated pattern of exchange rate
Market Based forecast: the current spot rate and the forward rate
Economic Models: Interest rate differential, the difference in GDP growth rates and income growth rate differences
Do not explain the methodologies.