International Financial Management

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FIN 4213 - Term Project – Spring 2020

Due Thursday, April 30, 2020

(100 points)

For your term project, you will make a recommendation on managing risk exposure for a

hypothetical multinational corporation (MNC) with (assigned) foreign currency cash flows scheduled

to occur in 3 months. The information you collect and analyze will help you assess the risk of your

firm’s foreign exchange exposure, forecast the exchange rate of one currency in 3 months, and make a

decision about hedging the transaction exposure for cash flows due in three months.

Information Sources: Use current financial and economic information in your analysis. You can

use data sources on the internet that are authentic or official. Some suggested resources are:

General Information

The Wall Street Journal – Foreign Exchange Quotations, as well as information on current

events of many countries.

Financial Times - – Foreign Exchange Quotations, Currency Futures and option quotes as well

as information on current events of many countries.

The Economist – Information in the back about interest rates, inflation rates and other

economic information for industrialized and developing economies. It is also a good

source for current events worldwide.

World Bank Reports and Data for Regions and Individual Countries

www.worldbank.org/html/extdr/regions.htm

CIA Fact Book https://www.cia.gov/library/publications/the-world-factbook/ General

information on every country. Very extensive, but a good source of background

information on the politics and environment of each country.

Exchange Rate Data and Information

OANDA website – www.oanda.com.

Financial Times – www.ft.com

International Monetary Fund –www.imf.org

Options and Futures Quotes and Information

Chicago Mercantile Exchange Home Page (www.cme.com) – more complete and extensive

information on currency futures.

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Philadelphia Stock Exchange (www.phlx.com) provides a good source of information for

option contracts on currencies

Other Data Sources

Home Pages for Central Banks – Some are more helpful than others, but they are worth a look.

The final report should be a Word or pdf document of about 3 to 6 double-spaced typed pages,

including all tables, exhibits, and graphs. Do not include the raw data (such as exchange rates) in

your report. Structure your project so that it flows well. Grading will be based upon content and

writing style.

General Writing/Format Guidelines

Your analysis should be structured to be the three-month window beginning from April 1,

2020.

Finally, be sure to cite the sources of your data and information in the bibliography at the end

of your report.

The suggested structure of the report is as following.

The first section is an introduction to the project. The introduction should indicate that your firm is a

U. S. MNC doing business in country ____, the foreign currency cash flows faced by your firm (see

below and the document “Project currency assignment” for currency and cash flow assigned to your

firm), and the purpose of the analysis. Also include in this section the current exchange rate system

(floating, fixed, pegged, etc) that your currency has against the US dollar. To find the information on

the exchange rate system, the central banks’ home pages may be useful sources as is the IMF website.

Section I. Introduction

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Net Transaction Exposure for the currency chosen for your MNC

(parentheses indicate cash outflow of the foreign currency)

Country Currency Net Exposure Country Currency Net Exposure

1. Argentina Peso 152,500,000 9. Malaysia Ringgit (81,520,000)

2. Australia Dollar (12,750,000) 10. Mexico Peso 126,350,000

3. Brazil Real 55,800,000 11. New Zealand Dollar (23,250,000)

4. Canada Dollar (22,600,000) 12. South Korea Won 7,650,000,000

5. China Renminbi 60,250,000 13. Sweden Krona (10,300,000)

6. Eurozone Euro (20,465,000) 14. Switzerland Franc 54,750,000

7. India Rupee 687,500,000 15. Thailand Baht (58,915,000)

8. Japan Yen (925,000,000) 16. UK Pound 9,750,000

In the section part, you assess the risk faced by the MNC. First, assess the current (or most recent

developments in) Economic, financial and (possibly) political environments for the country chosen,

and make comments on their stability or risk. If you are assigned the Eurozone, you can assess the

whole Eurozone or one specific country in the eurozone (e.g., France, Italy, Germany, etc). The

sources listed under General Information are a good place to begin this assignment.

Section II. Risk Analysis:

Be certain to cite

your sources within the text of your report and include it in the bibliography

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Then assess the exchange rate risk. Use OANDA.com to collect daily exchange rates for the one-year

period, April 1, 2019 – March 31, 2020, for the currency assigned to you. Go to

https://www.oanda.com/fx-for-business/historical-rates, register for a 30-day free trial pro account

and sign in, choose the time range and currencies, and download the historical daily exchange rates.

Use direct quotes, i.e., number of US dollars per foreign currency. Specifically, choose your assigned

currency as “Currency I have”, and US Dollar as “Currency I want”. Set the frequency to Daily. You

can use either ask, bid or mid price. The free trial account allows only one download. So double check

the specified time range and currencies before clicking on “Download”. Save the daily exchange rate

in an excel spreadsheet.

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Next, do the following statistical analysis in excel:

(1). calculate the daily percentage change in exchange rate.

(2). for the whole one-year period and each of the four quarters, compute the mean of daily

exchange rate, standard deviation of daily percentage change in exchange rate, and appreciation or

depreciation rate (in percentage) over the period.

April 1, 2019 – March 31, 2020 (1-year period)

April 1, 2019 – June 30, 2019 (Quarter 1)

July 1, 2019 – September 30, 2019 (Quarter 2)

October 1, 2019 – December 31, 2019 (Quarter 3)

January 1, 2020 - March 31, 2020 (Quarter 4)

Create a table to report the mean, standard deviation, and appreciation or depreciation rate for the five

periods. Include the table in your report. An example of such table is as below.

1-year period Quarter 1 Quarter 2 Quarter 3 Quarter 4

Mean of daily rates

Std.dev. of daily % change

Appreciation/depreciation rate

Also, create a line graph plotting the daily exchange rates for the entire one-year period (the dates on

the horizontal axis), and include the graph in your report.

Write a description of what you observe from the statistical data reported in the table and the graph,

focusing on the movement and variability of exchange rate during those periods. Do not turn in the

exchange rates you have collected.

In this section you forecast exchange rate. Use the spot exchange rate for the currency as of April 1,

2020 as the current exchange rate and make forecasts of the exchange rate in 3 months. You will make

three forecasts. Two forecasts are based on purchasing power parity (PPP) and international Fisher

Section III. Exchange rate forecasting :

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effect (IFE), respectively. See the spreadsheet file “Project data” for inflation and interest rates data.

Show every step in your calculation.

For example, when you make forecast using PPP, write down the formula for PPP:

ef = (1+Ih)/(1+If) – 1

Explain the variables in the equation. State the inflations rates for the home country (US) and the

foreign country. Plug in the inflation rates into the equation to calculate ef. Then estimate the forecast

as St = S0 (1+ ef), where S0 is the current spot rate (the spot rate on April 1, 2020) and St is the

forecast.

Show the similar calculation details for forecasting using IFE.

In addition, use current spot rate as the third forecast.

From the three alternative forecasts, choose one as the single point forecast for the currency and justify

your choice (i.e., briefly explain why you choose that forecast).

Finaly, construct a forecast interval for the currency. The forecast interval specifies a range (the highest

or lowest values) that the currency could be in 3 months, i.e., the predicted maximum and minimum

exchang rate above and below your point forecast. The conventional forecast interval is at 95%

confidence level, and is within two standard deviations from the point forecast:

95% forecast interval : [St – 2Stσ, St + 2Stσ]

where, St is the point forecast that you choose, and σ is the standard deviation of daily percentage

changes in exchange rate that you calculate in section II. Clearly show your calculation of the

forecast range.

Write an assessment of the risk of your firm’s exposure. This assessment should include the size of the

foreign cash flow, whether it is an inflow or outflow, and the US dollar equivalent of the cash flow

(calculated using the spot rate on April 1, 2020).

Section IV. Hedging decision:

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Make a decision on whether and how to hedge the foreign cash flow. Explain your hedging strategy

you would use given your firm’s exposure in the foreign currency.. If you decide to hedge using

currency derivations, check CME.com to see if forward, futures or option contracts exist for the

currency. If none of the currency derivatives exist, suggest an alternative way to hedge. If you decide

not to hedge, justify your decision.

+ Bibliography

Submit your final rep ort in a Word or pdf document through Canvas . Include your name and section

number on the first page of your report . The submission deadline is m idnight of Thursday, April 30,

2020.

Submission