You have been recently hired as a financial analyst by a multinational firm incorporated in New York with operations across the globe. The Chief Financial Officer is concerned about the movements of the exchange rates against the dollar, as foreign subsidiaries profits need to be converted to US dollars, and fluctuations of the exchange rates would affect the overall results.
You have been charged with the important task of forecasting exchange rates movements in one of the foreign countries where the company is operating.
Luckily, you have taken an International Finance course at CUD where you learned to analyze the balance of payments (BOP) and to appreciate its importance as an indication pressure on a nation’s economy. Therefore, you feel ready and confident to perform this task.
The balance of payments is an accounting statement that summarizes all economic transactions between residents of the home country and residents of all other countries. It signals the imposition or removal of controls in various sorts of payments, and helps forecast a country’s market potential.
Instructions:
Form a group of 5 students to work on this assignment.
Select a country of your chosen (other than the United States), and extract its balance of payments for the last 8 to 12 years (based on data availability).
You can use the website of the International Monetary Fund (IMF) of the website of the Central Bank of the country you selected.
http://data.imf.org/?sk=7A51304B-6426-40C0-83DD-CA473CA1FD52&ss=1409773422141
1.
Provide the definition of a balance of payments and its different accounts and discuss its importance.
2.
Analyze the country’s current account, capital account, financial account and overall balance. What causes the shifts in these accounts?
Use graphs.
3.
Discuss the relationship between shifts in the current accounts balances and shifts in financing accounts. Report your graphs.
4.
How did the government use its reserves to balance the BOP?
5.
Extract data on the country’s economic growth. What is the relationship between the trade balance and the economic growth?
6.
For the selected years, discuss the relationship between the BOP and exchange rate movement of the local currency against the USD.
Average annual exchange rates can be found on the website of the World Bank:
http://data.worldbank.org/indicator/PA.NUS.FCRF
Other websites offer daily exchange rates information (example: IMF)
Use graphs or regressions.
7.
Report inflation rates data for the years selected. Is there any observable relationship between the balance of payments accounts and inflation rates?
8.
What is the country’s policy in regard to capital mobility (capital flows in and out of the country)? If controls exist, what is their impact on the currency movements?
List at least 6 references.
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Total grade 20 marks. While 15% of the weight will be for the written report, 5% will be allocated to the group presentation. The report is due on March 23rd. Please submit both the word report (.docx) and the excel file with all your work on Moodle.
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