It is 2016. You are the financial manager of the Jaguar Land Rover subsidiary of Tata Motors (symbol: TTM). You are considering opening a new facility in the United States or in the United Kingdom. You are concerned that a weak British pound will increase the costs of steel imports that are used to manufacture vehicles. You want to figure out whether the June 23, 2016 Brexit vote weakened the British pound and increased exchange rate risk. Therefore, you will perform an event study of the Brexit vote. That is, you will compare the returns and volatility of the British pound to US dollar exchange rate before and after the vote. You predict that after the Brexit vote that the expected returns to holding pounds are lower and the volatility of the pound is higher. Your challenge is to calculate the returns to the GBP and USD exchange rate (GBP/USD), which will then be used to perform your event study analysis.

a) First, calculate the daily log returns for the GBP to USD exchange rate. Go to Yahoo! Finance and click on Historical Data for GBP/USD. Click on Historical Prices and download daily GBP/USD price data from June 14, 2016 to June 30, 2016.

Next, calculate daily log returns for GBP/USD using the equation: : = n(1), , where rt is the return in day t, t is the adjusted closing price in day t, and ln is the natural log. When calculating returns, make sure your data are sorted so that time is in ascending order, not the default descending order. You will not have a return observation for the first day of your time series.

Graph the daily returns on the y-axis versus the date on the x-axis. For the graph, draw a straight line through the ten points. Report the graph and explain what you think that it shows.