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Assignment Briefs 10-12-2024

Critical knowledge of key theories and activities of international financial markets and understand their implications.

University of Sunderland in London

PGBM 144 International Financial Markets and Econometrics

Assignment Guide – July/August 2022

Recapitulating the Module’s Learning Outcomes:

Upon successful completion of this module, you should be able to:

Knowledge:

  1. Critical knowledge of key theories and activities of international financial markets and understand their implications.
  2. Critical understanding of methods of applied econometrics for rigorous analysis of financial markets.
  3. The ability to integrate theory with evidence to empirically evaluate financial theories and models to arrive at a conclusion.
  4. Data collection, presentation and interpretation skills.
  5. Computing skills and the use of econometrics software packages for the analysis and evaluation of the financial data.

Skills:

Further Preambles:

  • As a student of PGBM 144 - International Financial Markets and Econometrics at this postgraduate levels, you are advised to be aware of the following:
  • To meet the requirements of this module, this assignment expects students to satisfy all the learning outcome with specific focus on the following specific learning outcomes regarding knowledge, understanding and skills regarding:
  • Exchange rate volatility in foreign exchange markets;
  • Risks involved in international financial transactions and in multinational companies’ operations;
  • The use of derivatives to cover for risks in international financial transactions and in multinational companies’ operations;
  • Market efficiency and financial econometric empirical investigations of market efficiency;
  • Monetary policy transmission mechanism and quantitative easing in international money market and international capital markets and stock prices;
  • Interpret financial data generated by financial markets;
  • Application of theoretical tools to analyse financial markets activities and operations; and
  • The use of relevant financial data and charts and graphs to illustrate findings and support discussions.

Notes:

  • In all, there are four (4) questions (with sub-questions as appropriate) to answer.
  • Marks allotted to each questions are reflected on the assignment brief (as attached).
  • In your answers, you have to make close references to key published academic literature and relevant financial data, charts, graphs and evidences.
  • You have an overall 5000 to 6000-word limit for this assignment. This excluded charts, graphs, diagrams, tables and appendices.
  • Maximise the use of the words limit to write and submit what would yield you good marks and grade.
  • Avoid writing unnecessary and irrelevant preambles and introduction (and table of contents etc).
  • Please avoid cheating, collusion and plagiarism when writing this assignment

Specific Requirements of the Assignment Questions:

Question 1:

  • This question is of two parts.
  • The first part of Question 1 requires you to display the knowledge and understanding of:

the recent movements in Pound/Dollar spot exchange rate

the need to relate to the recent movements in Pound /Dollar spot exchange rate to main causes of exchange rate volatility in the foreign exchange markets, specifically the Pound/Dollar spot exchange markets.

  • The second part of Question 1 requires you to display the knowledge and understanding of:

The influence and impact of exchange rate volatility on international trade.

  • These sub-questions require you to:

Exhibit critical evaluation and critical analysis.

Use of relevant financial data and charts to illustrate your answer.

  • The entire Question 1 is for 20 marks.

Question 2:

  • The question requires you to display the knowledge and understanding of:

The features and nature of potential risks in international financial transactions;

The management of risks faced by international traders with derivative markets instruments and tools;

Reasons for preference for currency options over forward and future contracts in hedging net payables or net receivables of international firms;

Demerits/disadvantages of hedging with currency option as against future contracts in international financial transactions;

  • These sub-questions require you to:

Exhibit critical evaluation and critical analysis.

Use of relevant financial data and charts to illustrate your answer.

  • The entire Question 2 is for 20 marks.

Question 3:

  • The question requires you to display the knowledge and understanding of:

Monetary policy transmission mechanism (MPTM) and its workings;

Quantitative easing (QE) operations;

Workings of MPTM and QE through International money market to impact international capital markets and stock prices.

  • These sub-questions require you to:

Exhibit critical evaluation and critical analysis.

Use of relevant financial data and charts to illustrate your answer.

  • The entire Question4 is for 20 marks.

Question 4:

  • This is an empirical question. It is not a theoretical question.
  • The question requires you to display the knowledge and understanding of:
  • Efficient market theory and hypothesis;
  • Testing for efficient market;
  • Relevant financial data collection (of at least three (3) companies listed on the London Stock Exchange;
  • Financial econometrics to investigate and generate findings that would lead to conclusions.
  • The use of econometric software (EViews, Stata, R, Phyton, SPSS Microfit etc) to run econometric estimations and generate outputs.
  • Interpretation of econometric estimations output and discussions of findings.
  • Critical evaluation and critical analysis;
  • From the review, I could identify the following analytical tools appropriate to test market efficiency, (which are all powerful tools):
  • Run test
  • Unit root (Stationary test) -ADF, PP and KPSS.
  • Durbin-Watson test (Autocorrelation/Serial correlation test)
  • Jarque-Bera test (Normality test)
  • Kolmogorov-Smirnov test
  • Variance ratio test (Heteroscedasticity test)
  • Ljung-Box Q test (Autocorrelation/Serial correlation test)
  • Autoregressive Conditional Heteroscedasticity Lagrange multiplier (ARCH-LM) Test
  • Autocorrelation function (ACF) test
  • The entire Question 3 is for 40 marks.

PLEASE NOTE: FOR ECONOMETRIC TESTS OF FINANCIAL MARKET EFFICIENCY, YOU ARE GOING TO APPLY ANY THREE (3) OF THESE TECHNIQUES TO TEST THE LONDON STOCK MARKET EFFICIENCY IN THE SUMMATIVE ASSESSMENT.

Sample Answer

Critical knowledge of key theories and activities of international financial markets and understand their implications.

The recent movements in Pound/Dollar spot exchange rate

The Pound/Dollar (GBP/USD) spot exchange rate has seen significant fluctuations recently, influenced by a combination of macroeconomic factors and market sentiment. The volatility can largely be attributed to the contrasting economic outlooks of the UK and the US, as well as broader global financial conditions.

One major driver of these movements is monetary policy divergence. The Federal Reserve has maintained a relatively hawkish stance, refraining from deep interest rate cuts amid strong economic indicators, such as higher-than-expected job growth and a resilient services sector in the US. In contrast, the Bank of England has been more cautious due to the UK`s stagnant economic growth and persistently high inflation. This divergence creates upward pressure on the US dollar, as higher interest rates in the US attract investors seeking better returns on dollar-denominated assets.

Another contributing factor to exchange rate volatility is the risk-off sentiment in global markets. In times of economic or geopolitical uncertainty, investors tend to flock to safe-haven currencies, like the US dollar, causing the pound to weaken. This dynamic has been amplified by concerns over the UK`s economic performance, including disappointing GDP growth figures and continued political uncertainty.

From a theoretical standpoint, Interest Rate Parity (IRP) and Purchasing Power Parity (PPP) help explain these movements. IRP posits that currencies with higher interest rates tend to appreciate due to the inflow of foreign capital seeking higher returns. In the current environment, the stronger US dollar aligns with this theory as the Federal Reserve`s higher interest rates attract investors. Meanwhile, PPP suggests that inflation differentials between the UK and the US should also impact the exchange rate, as goods become relatively more expensive in higher inflation environments, leading to a depreciation of the currency.

Furthermore, the global economic outlook, particularly around commodity prices like oil, can also impact the GBP/USD rate. Historically, the pound has been somewhat correlated with oil prices due to the UK’s role as an oil producer.

Continued...

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