Part A (10 marks): Excel Calculations

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.

1. For each period of 2000Q4 and 2017Q4, calculate the changes of the exchange rate, forward premium (discount). (5 marks)
2. 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)

3. 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)

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

d) Carry Percenta Forward c) Trade b) ge SPOT FWD Inflation Inflation premium Expected Exchange Rate Gain/Los b) IRP c)PPP Violated? (AUD/US FORWAR (AUD/US D PTS Change Implied rate rate i (AUD). i (USD). in Spot discount forward Violated?| Date D) D) (AUD) 2.8% (USD). 3.8% 3.7% 3.5% 3.4% 2.9% 5.58 6.38% 6.26% 2000/3/31 1.6473 1.6479 3.1 6.18% 6.10% 2000/6/30 1.676 9.22 1.6769 6.23% 4. 2000/9/29 1.8425 3.52 1.8429 6.19 5.80% 1.7901 17897 3.61 5.8% 5.48% 5.19% 2000/12/29 4.88% 6 2001/3/30 2.0595 -0.89 2.0594 6.0% 5.29% 3.2% 5.28% 7 2001/6/29 19545 -14.32 19531 6.1% 6.06% 2001/9/28 5.53% 2.6% 4.73% 8 2.0356 -21.33 2.0335 2.5% 16% 5.09% 9 2001/12/31 1.9629 -29.26 1.9600 3.1% 6.02% 1.5% 11% 15% 5.28% 4.93% 3.87% 10 2002/3/29 18771 -34.53 1.8736 3.0% 6,35% 2002/6/28 17776 -46.28 1.7730 2.8% 6.08% 11 1.8428 -41.99 12 2002/9/30 1.8386 3.29 5.35% 13 2002/12/31 14 2003/3/31 -46,79 2.4% 4.03% 1.7801 1.7754 2 9 5.17% 16539 -52.22 1.6487 3.3% 5.34% 3.0% 3.81% 15 2003/6/30 1.4847 -58.81 14788 2.69 5.02% 2.1% 3.33% 16 2003/9/30 17 2003/12/31 18 2004/3/31 19 2004/6/30 1.4696 -63.73 14632 2.6% 5.39% 2.3% 4.27% 1.3298 -80.64 13217 2.4% 5.61% 19% 4.27% 1.3042 -83.02 12959 2.0% 5.50% 17% 3.83% 4.73% 14306 - 70.03 1.4236 2.5% 5.95% 3.3%