Bloomberg Finance Assingment Help With Solution
Question 1: bid-ask spreads
a. How wide are the percentage bid-asked spreads for those four currency pairs, at various contract maturities?
b. Do the mean/median spreads widen with contract maturity? Are the spread generally higher for some of the currencies? Can you venture an explanation for the pattern?
Hint 1: Build a third table with volatility estimates for the 4 exchange rates. To that effect, you (i) should either use the average (or median) percentage “high minus low” of the relevant exchange rate (aka the “realized volatility” of that rate) or use the more conventional standard deviation of the daily currency rates of return and
then (ii) can see whether the percentage spreads are correlated with volatility.
Hint 2: Build a fourth table with volume estimates for the 4 exchange rates and see whether the percentage spreads are correlated with spreads (which are, as we discussed in class, a measure of liquidity).
Question 2: Covered Interest Rate Parity
Over the last six years, has covered interest rate parity held?
1. As a rough first pass, you could intuitively use the relevant LIBOR and midpoints of the daily Forex rate bid-ask quotes to check that, each day in your sample period and for each currency pair (for all three forward delivery dates), the forward premia/discounts were approximately equal to the relevant interest rate differentials:
2. For the EUR/USD forward rates, please also proceed more formally. You should check whether the EUR/USD forward rates are in line with the spot rates, after adjusting for the relevant interest rate differentials. Do not forget to take into account bid-ask spreads for exchange rates (Bid vs. Asked) as well as interest rates (LIBOR on the ask side vs. LIBID or another deposit rate).
Hint: verify whether there is any day in your 11-year sample when either of the following inequalities do not hold:
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Question 3: Yen carry trades
a. Over the last 11 years, could you have made money from carry trades, using the yen as the funding currency (borrowing at LIBOR) and the US dollar as the target currency (depositing at USD LIBID or some other measure of the USD interbank deposit rate)?
Hint: Assume that you are continuously doing carry trades during the past 9 years, using 1-month or 3-month loans that you roll over. Describe the instruments you plan on using to implement your carry trades, your roll-over strategy, gains/losses, etc.
b. What would the risks have been? Please show your work.
Hint: For example, what would have happened to your bet in Fall 2008? More generally, what does the distribution of your carry-trade gains/losses look like – like a normal distribution, or something else? If the latter, what is your interpretation?
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