Download PAPER REQUIREMENTS

PAPER REQUIREMENTS
GRADING CRITERIA
The papers will be graded on a number of criteria. Among these are:
1.
Content: complete set of references are important.
2.
Logical progression: see Writing Guide.
3.
Presentation of the tables, figures, and data. They should be presented in a professional
manner. See Writing Guide!
4.
Writing style and whether the writing guidelines were met.
1. REAL EXCHANGE RATES DUE: October 25
Length: Two page executive summary plus table.
Paper focus:
a. Is there an empirical relationship (correlation) between the real exchange rate and current
account balance? Outline the theoretical relationship.
b. Graph the real exchange rate and nominal exchange for your country. See page 147. When
has your country's currency been too high? What are the implications for a multinational firm?
In addition, graph international reserves and current account balance.
Directions
Create the real exchange rate from price indexes as follows:
ert = e0 *(It /I0)/(I*t/I*0)
er = real exchange rate (home currency/foreign currency), ie. S(/$) if Britain is your country;
e = nominal exchange rate;
I = price index.
* = foreign country;
t = number of periods;
0 = base period: first year of observation.
For example:
The base year chosen is 1970. The nominal exchange rate in 1970 is 0.4178/$ and 0.4193/$ in
1980. The U.S. price index in 1970 is 30.6 and 62.6 in 1980. The U.S. price index in 1970 is
14.8 and 54.7 in 1980. The U.K./U.S. price differential is: (54.7/14.8)/(62.6/30.6) = 1.81.
According to PPP, the U.K. pound should have depreciated by 81% to 0.7562/$
(0.4178/$*1.81). Since it should (real exchange rate) take 0.7562 pounds to buy one dollar
according to PPP, but only takes 0.4193 pounds to buy one dollar, the pound in 1980 is
overvalued. This should be reflected in its exchange rate and the current account. Remember,
PPP has its limitations; see the notes to this chapter.
Choice of Base year: You should choose your base year as the year in that your country's current
account was close to zero or at its lowest point.
Data:
Exchange rate: IFS code ae (end of period)
International reserves: IFS code 1l.d
Price index: IFS code 99.bi.r
Starting Sources:
1.
References to PPP and real exchange rates in biography.
2.
Foundations of Multinational Financial Management, Alan Shapiro
3.
OhioLINK: Research Databases: Business:
http://www.ohiolink.edu/resources/dblist.php?by=subject&search=busi
2. INTERNATIONAL PORTFOLIO INVESTMENT DUE: November 29
Length: Two page executive summary plus graphs and data from spreadsheet in an Appendix.
Paper focus: Analyze the feasibility of international portfolio diversification. Would you
diversify internationally? Examine the lowest risk portfolio and the notion of risk and return.
Would you include emerging markets into your stock portfolio?
Directions
Create a graph between the standard deviation (risk) and return of an international portfolio
consisting of the U.S. (or S&P 500) and the EAFE (Europe, Australia, Far East) index (U.S.
dollar returns). See page 467. Use the most current data from Morgan Stanley Capital
International. Next, construct a portfolio with the world index and the emerging markets (U.S.
dollar returns).
Use the following equations:
Equation 1: rp = arUS + (1-a)rEAFE
where r = average rate of return on equity over the period;
p = portfolio;
a = weight (0, 0.1, 0.2, 0.3, ..., 1) These weights change in ten percent increments, so there are
eleven combinations to compute for the risk and return that can be graphed.
Equation 2: p = [a22US + (1-a)22EAFE + 2a(1-a)USEAFEUS,EAFE]½
2 = variance
 = standard deviation;
US,EAFE = correlation between the two markets.
The variance is a measure of dispersion expressed in squared deviations. It is the average
squared deviation from the mean, or on average how far away are observations from the mean.
The standard deviation also describes dispersion and is the square root of the variance. An
important difference is that it is measured in the same units as the data.
The portfolio standard deviation is the standard deviation of the U.S. market, the standard
deviation of the EAFE, and how the two are related.
Correlation measures how strongly two variables are related. The correlation coefficient can
range in value from 1 to -1. If the correlation coefficient is high, then the benefits to
international diversification are low. As long as the correlation between the two markets is not
perfect, then there are benefits from international diversification.
Data:
Morgan Stanley Capital International/ Barra. You will need to create a password.
http://www.mscibarra.com/products/indices/stdindex/performance.jsp
The data is a daily index. You will need to create a rate of return by the following:
(It+1 - It)/It * 100
For example:
If the world index in April 12, 1999 was 1,233.06 and 1187.54 in April 11, 1999, then the rate of
return was (1,233.06-1,187.54)/1,187.4 * 100 = 3.83% for that day.
Excel Commands:
To create the first equation, you must first get the averages of all the rates of return. Use the
Average command under Insert, Functions, Statistics.
You must use the graph XY scatter option to create a chart.
For example:
If the U.S. average rate of return over the period was 1.95% per day and the EAFE rate was
0.59% per day, then the rate of return on an international portfolio with 80% U.S. stocks (a=0.8)
and 20% EAFE stocks would be:
rp = (0.8)(1.95%) + (1 - 0.8)(0.59%) = 1.68%
To create the second equation, you must get the standard deviations and correlation between
series. Use the CORREL and STDEV under Insert, Functions, Statistics.
For example:
If the U.S. standard deviation was 3.96%, the EAFE standard deviation was 3.90%, and the
correlation between the U.S. and EAFE markets was 0.67, the standard deviation for an
international portfolio with 80% U.S. stocks (a=0.8) and 20% EAFE stocks would be:
p  (0.8) 2 (3.96) 2  (1  0.8) 2 (3.90) 2  2(0.8)(1  0.8)(3.96)(3.90)(0.667) = 3.73
note: the standard deviation of the combination of the two assets is lower than either asset alone.