Students should form groups of at least five. Every student in the group will receive the same grade. Each group will manage an imaginary amount of capital which will be invested in currencies and stocks. All trades should happen in the spot market. The amount of capital to be invested is one million Canadian dollars. Emphasize currency trades by trading a large number of currencies. Minimize investment in Canadian stocks and focus investment in foreign stock markets to confront exchange rate risk linked to equity investment. Investment in Canadaian securities should not exceed fifteen percent of the portfolio.

Students should form groups of at least five. Every
student in the group will receive the same grade. Each group will manage
an imaginary amount of capital which will be invested in currencies and
stocks. All trades should happen in the spot market. The amount of capital
to be invested is one million Canadian dollars. Emphasize currency trades
by trading a large number of currencies. Minimize investment in Canadian
stocks and focus investment in foreign stock markets to confront exchange
rate risk linked to equity investment. Investment in Canadaian securities
should not exceed fifteen percent of the portfolio.
The goal is to place you in the position of currency traders and portfolio
managers. You must analyze the economy and financial markets to derive
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trading strategies. A report must be submitted at the end of the term describing
the overall strategy and reasons for key trades. It should include
statements of trading profits/losses in Canadian dollars. The package should
be approximately 6-8 pages in length. It is possible to obtain capital gains by
trading stocks and currencies at high frequency. The goal is keep informed of
price movements in financial markets to ensure the best possible trades. To
make the project manageable write up the reasons for trades and the results
as they occur instead of waiting to the end of the course to compile results.
The grade will be determined by the quality of analysis rather
than overall profitability. The point is to apply the economic models
taught in the course to predict exchange rate and stock price
movements. Macroeconomics affects asset prices so the objective of
the project is to use exchange rate models to construct investment
portfolios. When a trade generates a loss the goal is to explain why
it happened using the models. For instance, suppose the release of
economic data causes depreciation of a currency you are holding
with an implied Canadian dollar loss. Explain why the data caused
the depreciation and why this did not conform to previously held
expectations. High quality analysis will generate a high grade.
Stock and Foreign Exchange Quotes: There are several websites
useful for accessing financial quotes free of charge.
1. Exchange Rate quotes are accessed via The Bank of Canada (bankofcanada.ca/rates/exchange/).
Select the Daily Currency Converter. Select
the foreign currency in the box marked ”From”. Select the Canadian dollar
in the box marked ”To” and press the box marked ”Convert” to obtain the
Canadian dollar price of the foreign currency.
2. Stock quotes:
a. Nasdaq quotes (www.nasdaq.com/): Select ”quotes” and key in the
stock symbol or company name in the seach box to access a quote.
b. finance.yahoo.com. Type the stock symbol or company name into the
”seach finance” box to access a quote. This can be used for NYSE stocks.
c. Toronto Stocks (Get Quotes-TMXmoney): There is a box where you
can enter the company name or stock symbol to access a quote.
Required text: Wang, P. The Economics of Foreign Exchange and
Global Finance, Springer, NYNY, 2009.
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The text is also available electronically in pdf format via the
University of Toronto library or in print from the bookstore.
Required Reading:
1. Chapter 1: Foreign Exchange Markets and Foreign Exchange Rates.
2. Chapter 2: Exchange Rate Regimes.
3. Chapter 5: Open Economy Macroeconomics.
4. Chapter 7: The Mundell-Flemming Model.
5. Chapter 3: International Parity Conditions.
6. Chapter 4: Balance of Payments and International Investment.
7. Chapter 8: The Flexible Price Monetary Model.
8. Chapter 11: Global Derivative Markets.
9. Chapter 12: Currency Futures.
10. Chapter 13. Currency Options.
11. Chapter 9. The Dornbusch Model.
12. Chapter 14. Currency Swaps.