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Exchange Rates Project – FINA 4308 – International Finance – Fall 2020 Deadline – December 7, 2020 (Projects may be submitted early.) Examine the movement of exchange rates from October 1, 2015 to October 1, 2020. Compare two foreign currencies to the U.S. Dollar. The first foreign currency must be the Euro. Data Collection: Collect exchange rates from the Federal Reserve Bank of St. Louis’ FRED site: https://research.stlouisfed.org/fred2/categories/15 1. Choose “Monthly Rates.” Choose the “U.S. / Euro Foreign Exchange Rate” series. Be sure to note whether the series is dollars per euro or euros per dollar. Enter “2015-10-01” to “2020-10-01” as the date range. Click “Download” on the right-hand-side of the page, choose “Excel (data),” and then name the file “Data1.” 2. Return to the FRED site. Choose “Monthly Rates.” Choose another of the listed exchange rate series (do not choose one that is noted as “discontinued”). Be sure to note whether the series is dollars per foreign currency unit or foreign currency unit per dollar. Enter “2015-10-01” to “2020-10-01” as the date range. Click “Download” on the right-hand-side of the page, choose “Excel (data),” and then name the file “Data2.” 3. Open Data1 from step 1. Copy the exchange rate data (including the date, exchange rates, and column labels/headers) to a new blank worksheet with the labels starting in cell “A1.” Rename the exchange rate header to indicate what the exchange rates are (e.g., Dollars to Euros). This should leave you with the dates in Column A and the Dollar to Euro exchange rates in Column B. Open Data2 from step 2 and copy the exchange rates (not the dates) into Column D. Leave Column C blank for now. Label the exchange rate column appropriately (e.g., Pesos to Dollar, Dollars to Pounds, etc.). Save the new worksheet and proceed to the Responsibilities section below and complete all items. Responsibilities I. Provide a spreadsheet that includes all of the following. Name the spreadsheet “yourname4308.” For example, if your name is John Smith, name the file JohnSmith4308. A. Data downloaded from FRED. (These are columns A, B, and D from above.) B. Columns showing the percentage change in each exchange rate each day. Create in columns C and E. Note: Percentage change = ((rate from one month)/(rate from previous month)) – 1. There will be no percentage change for the first exchange rate entry (row 2). C. Column that calculates the implied cross rate between the two foreign currencies using data for the U.S. Dollar relative to the two foreign currencies. Use the Euro as the base currency (e.g., Pesos to Euros). Create the cross rate series in column F. (Note: Follow Project Problem 1.) Label the column appropriately (e.g., Pesos to Euros). Format the column to show six decimal places. D. Show the mean, median, standard deviation, minimum, and maximum values for each exchange rate and percentage change column. (Use Excel statistical functions to calculate values at the bottom of each data column.) For example, the mean may be calculated as: =average(b2:b62). E. Graph of the exchange rates over the five-year time period using the U.S. Dollar as the base currency. Note that this may require you to restate your exchange rates since some rates (like the Dollar/Euro series) use the foreign currency as the base in the FRED database. Put both exchange rates relative to the dollar on the same graph. Create this graph on the second worksheet page in the workbook. Underneath the graph, write a short note indicating whether the U.S. Dollar has appreciated or depreciated relative to each of the foreign currencies over the five-year period. F. Graph of the cross rate for the foreign currencies over the five-year time period using the Euro as the base currency. Create this graph on the third worksheet page in the workbook. Underneath the graph, write a short note indicating which currency has appreciated relative to the other over the five-year period. https://research.stlouisfed.org/fred2/categories/15 II. Answer the following questions in a Word document named “yourname4308.” A. Answer the following three questions using the exchange rates from the last data date. 1. If you converted $20,000,000 into Euros, how many Euros would you have received? 2. If you converted $20,000,000 into your second foreign currency, how many units of the second foreign currency would you have received? 3. If you converted 10,000,000 Euros into the second foreign currency, how many units of the second foreign currency would you have received? B. Suppose on August 1, 2019 your company entered into a contract to deliver goods to Germany. Delivery of the goods was to occur three months later (November 1, 2019) with full payment of 35,000,000 Euros due on the delivery date. Suppose on August 1, 2019 when you signed the contract, the three-month forward exchange rate was equal to the spot exchange rate on that date. If you had entered into a forward contract using the August 1, 2019 exchange rate to hedge your 35,000,000 Euro conversion into U.S. Dollars, what would your gain or loss have been in U.S. Dollars on the forward market transaction? (Hint: Similar to Project Problem 2.) C. Go to http://www.usforex.com/forex-tools/historical-rate-tools/historical-exchange-rates. Use the site to determine the actual exchange rate between your two foreign currencies (Euro and other foreign currency) on May 1, 2020. 1. List the actual exchange rate for the two currencies and the cross rate you calculated for that date in step I.F. above. 2. Show the profit earned through the process of triangular arbitrage if there were no transaction costs and you were to begin with the equivalent of $50,000,000 (U.S.) using the actual exchange rates from May 1, 2020. Show all calculations for the necessary steps. (Hint: Look at Project Problems 3.) Due Date and Grading The project is due no later than December 7, 2020 at 11:59 pm. Submit the project via Class Email in Blackboard. Your submission should include two project files (Excel spreadsheet and Word file). You may need to send two separate messages since only one attachment is allowed per message. Project grades will be based on the following criteria. The scores for all categories will be summed to determine your overall project grade. Missing Fair Good Excellent Score Collection of data and spreadsheet arrangement 0 10 15 20 Percentage change calculations 0 5 8 10 Summary statistics 0 5 8 10 Graphs 0 5 8 10 Implied cross rates 0 5 10 10 Question II. A. 0 10 points total Question II. B. 0 10 points total Question II. C. 0 20 points total TOTAL POINTS (Project parts may be rated as falling in the middle of scoring categories. For example, if the “Summary statistics” section of a project is rated as falling between “Good” and “Excellent,” it could receive a score from 16 to 19 on that section.) http://www.usforex.com/forex-tools/historical-rate-tools/historical-exchange-rates