FINC6013

International Business Finance

Semester 1, 2025

Group Assignment

Group Formation

This is a group research project that must be completed and submitted as a group. To encourage collaboration, students are encouraged to form a group of 4-5 students during the first two weeks of the  semester. Forming  groups  from  the same tutorial is encouraged as you can work on the assignment in class with help from the tutor! The tutor will also facilitate group formation in the first two/three tutorial classes. The class tutor should be the first contact if you need any help with the assignment  (group formation and  preparation). The  Discussion  Forum  on  Canvas  has  a  dedicated section on group formation and assignment preparation.

Each group is required to complete the group registration by Week 4 on Canvas. Click on the tab “people”, then “assignment group” . You can choose to enrol into any of the unfilled groups in the list. Group registration will remain open until the start of Week 4 (Monday 9am). Students not registered in a group by Monday of Week 4 will be randomly assigned to an unfilled group. Please make sure to complete group registration before it closes. Please also note that by default the first listed group member shall be the group leader, who is responsible for submission of the assignment.

Mark Allocation:

This project will be marked out of 30 and constitutes 30% of your overall grade.

Length:

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 the coverage (page only contains the title and group members’ IDs) and 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

•    Tables

•    Figures

• Reference list

What’s excluded from the 12-page limit?

•    Title (Cover) page

• Table of contents

•    Appendices (maximum 5 pages)

Due date:

The due date for the project is 11:59pm May 16th, 2025 (Week 11). A late penalty of 5% mark per day is applicable (see Unit outline).

Submission:

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.

Submission Format:

Each group can only submit ONE project report. The group leader (designated within the group) is required to submit the assignment (do NOT submit if you are not the group leader). 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. Please make sure the group leader submits only the final version of the assignment, as there is only ONE submission allowed. Submitting multiple versions might result in a penalty of 1 mark.

Cover Page:

Ensure  the  Student  Identification  Number  (SID)  of EACH student is  on  the  cover  page  of  your assignment. Student names should NOT be included in the assignment to ensure anonymous marking. The cover page should be submitted as the front page of the assignment in a single file.

Document Name:

Your project PDF file must be named in the following format:

FINC6013_Groupnumber_2025.PDF

Example: FINC6013_Group23_2025.PDF

There will be a penalty of 1 mark for incorrectly named projects.

Referencing:

List of references used and in-text citations must follow the Harvard referencing style

http://libguides.library.usyd.edu.au/content.php?pid=160012&sid=1510179

Students are expected to use more than 6 references in total.

Ensure to use academic reference (not solely web sources) to support your discussions/arguments.

Presentation:

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.

Use of AI:

The use of automated writing tools and generative artificial intelligence is prohibited in this assessment. You are not allowed to use AI or other software to create information or answers, to alter your own  original writing, or to generate or modify text from other sources. This includes translation software,  editing/paraphrasing software and other generative AI tools.

Unapproved use is considered a breach of the Academic Integrity Policy and may result in penalties, which can include a fail for the assessment. Note also that, if you do choose to use these tools, outputs and AI-generated content in the context of this assignment is known to be highly inaccurate.

Information Sources:

•    FRED®  database of the Federal Reserve Bank of St. Louis:https://fred.stlouisfed.org/

• Central bank web sites of relevant currencies

•    Web sites of international organizations – OECD, IMF, BIS, etc.

•    International Financial Statistics (online database available from Fisher Library’s website)

•    Newswire  and  financial   newspaper  reports  (accessible  via   Factiva  database  from   Fisher Library’s website)

•    Other Web sources – market commentaries of FX and money market movements

Penalties:

Late penalty:

Refer to Unit outline.

Incorrect 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.

Plagiarism:

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.

http://sydney.edu.au/student_affairs/plagiarism/index.shtml

Be sure to acknowledge all of your source materials and  provide  proper citations for any quotes. Checks  for  similar  content  (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.

Group Work Ethics:

Every group member is expected to be actively engaged in the whole process of group assignment. Though it is hard to divide the work completely equally, “free riding” will not be tolerated.

From week 4 to week 10, you are expected to meet at least four times to discuss the assignment tasks and to update your group members on your progress. At your first group meeting, please decide who will be the group leader. The group leader will be responsible for coordinating the work of the group and submitting the group report by the deadline.

Each group member will complete the Peer Performance Assessment Form (available on Canvas) and submit the form. separately online. Due to the limited marking time, we must give all group members the  same  mark  based  on  group   performance.   However,  free   riders  will   be  penalised  and  the information you provide on the Peer Assessment Form will be used to determine whether a group member has made a reasonable contribution to the group's work.

Assignment topic continued on the next page … .

Carry Trade and U.S. Elections

A  currency  carry  trade  involves  investors’  arbitrage  upon  interest  rate  differentials  between  two currencies.  Carry  trade  is  typically  profitable  if  the  interest  rate  differential  is  greater  than  the appreciation in the funding currency against the investment curry. Historically, investors could borrow a low interest currency, such as the Japanese Yen, and invest in a higher interest currency, such as AUD.

The potential for carry trade to be profitable depends on the impact of countries’ economic policies and monetary tools on financial markets. In most countries, government policy direction depends on the outcome of government elections. In particular, as a key player in global markets, outcomes of U.S. elections  often  generate  material   uncertainty  about  global  economic  and  monetary   policies, significantly affecting foreign exchange markets (Brogaard et al., 2020). In this assignment, you will examine how these effects impact the profitability of carry trade.

Specifically, you will investigate how changes in investor expectations about countries’ economic and monetary policies around the 2016 and 2024 U.S. elections affected the profitability of carry trade, and you will generate  a forecast  of the  profitability  of  carry  trade  for  2024-2025.  A  high-quality assignment should include a balanced quantitative and qualitative analysis, including argumentation well supported by either academic or/and industry references.

Each group is required to select a SINGLE currency pair of YOUR OWN GROUP’S CHOOSING, with one currency the US Dollar (USD), for which carry trade is expected to be profitable. Once you have decided on a currency pair, you are required to find and collect the following real-world data from online sources:

(i)           exchange rate, and

(ii) monthly (usually 30-day or alternative short-term) money market interest rates for both currencies (i  and  i* ).

There are four parts of the assignment, listed below:

1. Examine UIP Violations Pre-2016 (8 marks)

a. First, justify your choices for your currency pair and interest rates: why do you expect this currency pair to deliver carry trade profits prior to 2016?

Then, predict the exchange rate at the end of each month for the period January 2014 to December 2015, assuming UIP is valid.

Present:

(1) a time-series of the predicted and actual realized exchange rates in one figure, and

(2) a time-series of the deviations between them in another figure.

b.  Since  the   UIP   condition  can  be  represented  in  different  ways,   deviations  from   UIP  can   be represented in different ways as well. One form. of UIP deviations are differences between forecasted and actual exchange rates, as discussed above. Another form are differences between percentage changes in exchange rates and interest rate differentials. Present a scatter plot of the interest rate differential, and the percentage change in the exchange rate. Discuss whether your data points lie on the 45-degree line through the origin.

c. Discuss the forecast accuracy of exchange rates and implications regarding validity of UIP during this two-year period. Identify the moments, if any, where UIP appears to have been significantly violated. Would you think you have identified a profitable carry trade strategy?

2. Empirical Testing of the UIP Pre- and Post-2016 (6 marks)

Use a regression analysis to test the validity of UIP for your currency pair for the periods 2014-2015 and 2016-2019. You can use Excel’s data analysis add-in or any other statistical package you have access to. Do you observe more deviations from UIP after 2016? Why or why not?

In your write-up, 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.

3. Forecasted Profitability in 2024 (8 marks)

Assume you are an analyst in December 2023 who does not yet anticipate the re-election of President Trump in 2024. You want to profit from a carry trade strategy based on your findings from Parts 1 and 2.

a.  Using the same  currency  pair  and  interest  rate data that you  collected  in  Part  1,  calculate the monthly carry trade profits/losses in terms of your financing currency, assuming that investors invest a certain amount of money at the beginning of 2024. You can also try different holding periods, such as quarterly or semi-annually (you may need to collect more data).

b.  Had  you  employed the  same trade  identified  in  2014-2015  (that  is,  the  funding  currency  and investment currency) as in Part 1, would you make any profit/loss? Why or why not? What main factors contributed to the profit/loss of your strategy? How would you explain the changes in carry trade profits/losses over time (monthly, quarterly, or semi-annually)?

c. Economists currently expect a Trump presidency to lead to economic policy changes that increase inflation, requiring the Federal Reserve to keep interest rates high, or to the introduction of high tariffs on foreign imports. If these expectations materialize, do you expect the returns from carry trade for your currency pair to increase or decrease in 2025? Why or why not?

4. Conclusion (3 marks)

Do you think conducting carry trade with your chosen currencies is profitable in the current (2025) economic landscape? Why or why not?

Additionally, 5 marks will be awarded for high quality executive summary presentation, references, and academic writing.

References

Brogaard, J.,  Dai,  L.,  Ngo,  P.T.H., and Zhang,  B. 2020. Global  Political  Uncertainty and Asset  Prices. Review of Financial Studies 33(4), 1737-1780.