Monetary Economics

As an analyst in Commonwealth Bank (Sydney), you are required to analyse two economies, namely Australia and U.S., and their associated currencies AUD$, and USD $, respectively.

Part A (10 marks): Excel Calculations
You first need to download the quarterly data of Australia and U.S. from Internet for the period between 2000Q4 and 2017Q4. In order to provide the below analysis, you need to have interest rate, exchange rate, inflation rate and forward rate data for both countries.

Hint: Data Download from Internet

Interest Rate Using (mid yield) data

Australia Australia 10 yr Govt Bond Yield Index

US US Treasury Yield Curve Rate T Note Constant Maturity 10 Year

Exchange rate (1) Make sure USD is unit currency

AUD / USD Australian Dollar (spot / forward exchange rates) Term = 3 months
Inflation rate
Australia CPI Index

US CPI Index

Forward AUD USD 3 month Forward points

• For interest rate, please use Australia 10 year government bond yield index and US 10 Year Treasury yield curve rate. Both interest rates should be mid yield data.
• The USD is foreign currency and unit currency for both spot / forward exchange rate in your calculation. The term of forward exchange rate is 3 month.
• Please use CPI Index and US – CPI Index to download inflation rate for Australia and the US respectively.

a. For each period of 2000Q4 and 2017Q4, calculate the changes of the exchange rate, forward premium (discount). (5 marks)
b. For each period of 2000Q4 and 2017Q4, calculate the implied forward rate by the interest rate parity (IRP). Identify the periods in which the interest rate parity (IRP) condition was violated. (Hint: we keep the first two decimal places when we compare implied forward rate calculated
from IRP and actual forward rate as the theory and reality may not be perfectly matched.)
(5 marks)

c. For each period of 2000Q4 and 2017Q4, calculate the expected exchange rate by the relative purchasing power parity (PPP). Identify the periods in which the relative purchasing power parity (PPP) condition was violated. (Hint: we keep the first two decimal places when we compare expected exchange rate calculated from relative PPP and actual exchange rate next period as the theory and reality may not be perfectly matched. (5 marks)

d. For each period of 2000Q4 and 2017Q4, calculate the carry trade strategy returns. (5 marks)

II. Presentation of your work (5 marks):
• Formulas for the calculations in Excel should have cell references wherever possible. If you have computed a number incorrectly and just typed that number into the spreadsheet (or typed a formula using numbers when cell references could have been used), you will not receive partial credit for any portion of your computation that is correct. (5 marks)