#2051190-0805-Assignment-INFORMATION ON FINANCE OF INTERNATIONAL
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Nov 24, 2024
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MBA7006
Finance of International Business
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Table of Contents
Introduction
................................................................................................................................
2
Part A
..........................................................................................................................................
2
Part 2:
.........................................................................................................................................
5
Part C:
.........................................................................................................................................
6
Conclusion
................................................................................................................................
10
References
................................................................................................................................
11
Page | 2
Introduction
There will be an analysis of the currency of the RMB, GBP and NZD to show the
effectiveness of the foreign exchange and there is a large area for trading or investment for
the financial experts. The study will also show a portfolio analysis which will examine the
various factors of the investment and the effectiveness to make an investment in the currency.
Though this study will be effective to analyse the scope of the foreign exchange and the
investment opportunities in this segment.
Part A
Average Daily Return of RMB/GBP
0%
Average Daily Return of NZD/GBP
0%
Maximum Return of RMB/GBP
1%
Minimum Return of RMB/GBP
-2%
Maximum Return of RMB/GBP
2%
Minimum Return of NZD/GBP
-1%
Mean Return of RMB/GBP
0%
Mean Return of NZD/GBP
0%
Standard Deviation of RMB/GBP
0.005221701
Standard Deviation of NZD/GBP
0.004775414
The variance of RMB/GBP
0.020598897
The variance of NZD/GBP
0.000101155
Covariance of RMB/GBP and NZD/GBP
-4.78969E-06
Correlation Coefficients of Returns
-0.192822708
Table: Calculation of the Currency Exchange
(Source: As created by the author)
Page | 3
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1
11
21
31
41
51
61
71
81
91
101
111
121
131
141
151
161
171
181
191
201
211
221
231
241
251
-2%
-2%
-1%
-1%
0%
1%
1%
2%
RMB/GBP Daily Return
Figure 1: RMB/GBP Daily Return
(Source: As created by the Author)
Figure 2: NZD/GBP Daily Return
(Sourc: As created by the author)
According to the collected information, the daily average return of 0% is seen for currency
pairs consisting of the RMB/GBP and the NZD/GBP. However, the range of returns that may
be achieved varies significantly between the two pairings, with the RMB/GBP giving a wider
variety of possibilities than the NZD/GBP does. Since the RMB/GBP currency rate has a
bigger standard deviation and variance than the NZD/GBP exchange rate, this indicates that
the RMB/GBP exchange rate is more volatile and carries a higher risk profile than the
Page | 4
NZD/GBP exchange rate. According to Gupta, Agrawal, and Yamaguchi (2019), the rising
degree of volatility seen in the RMB/GBP currency pair may be linked to worries over
China's economic policies as well as tensions around global trade. Because China is one of
the largest economies in the world, the value of the RMB might be considerably impacted by
China's economic policies and its commercial links with other countries. The value of the
RMB has been volatile over the course of the last several years as a result of trade tensions
between China and the United States. For example, in response to increasing tariffs imposed
by the United States on imports from China, China allowed the RMB to fall to its lowest level
in nearly a decade in August 2019, which was the lowest level in almost a decade. It's
possible that the RMB/GBP currency pair saw negative returns as a result of this
depreciation.
On the other hand, fluctuations in the prices of commodities and global economic conditions
may have an impact on the exchange rate between the New Zealand dollar and the Great
Britain pound (Dassanayake, 2022). The export of agricultural items such as dairy products,
cattle, fruit, and vegetables is a significant contributor to New Zealand's GDP. As a result,
shifts in the pricing of commodities, such as a fall in the price of dairy products, may have an
impact on the value of the New Zealand dollar. Changes in interest rates or political unrest in
countries that are New Zealand's neighbours are two examples of global economic conditions
that might have an impact on the value of the New Zealand dollar.
According to the findings of O'Meara and South (2019), the negative covariance and
correlation coefficient between the RMB/GBP and NZD/GBP currency pairings indicate that
these two currency pairings are not strongly related to one another. As a result, having
exposure to both currencies may assist to spread out the risk associated with investments.
Finally, the risk and return profiles of the currency pair RMB/GBP and NZD/GBP are quite
different from one another for a variety of factors relating to the economy, the banking sector,
and politics. There is a noticeable increase in the level of uncertainty around the RMB/GBP
exchange rate, which may be influenced by the economic policies of China as well as the
tensions that exist in international commerce. In the meanwhile, the NZD/GBP currency pair
may be influenced by the pricing of various commodities as well as the economic climate
throughout the world. consciously invest in a variety of different currency pairs, it could
potentially lower the overall level of risk associated with that portfolio.
Page | 5
Part 2:
The user advises allocating 50 percent of the portfolio to the RMB/GBP pair and the
remaining fifty percent to the NZD/GBP pair in order to build a portfolio that has an equal
weightage of currencies. Assuming that they have an initial investment of £10,000, they will
divide it up such that each currency receives an equal allotment of £5,000. According to
Chen, Zhong, and Chen (2020), in order to compute the daily rate of return of the portfolio,
one must first determine the weighted average of the daily rates of return experienced by each
of the two currencies. According to the user's statement, the formula for calculating the daily
return of a portfolio is generated from the weighted average of the daily returns of two
currency pairs. These currency pairs are RMB/GBP and NZD/GBP. The method for
calculating the daily return of a portfolio is based on this weighted average. According to the
comment made by the user, the weights that are put on each currency pair are exactly the
same and have a value of 0.5. Utilising the daily exchange rate data that was previously
supplied allows for the computation of the portfolio's daily returns, which can be found in the
preceding sentence.
According to the data shown in clauses (a) through (e), a portfolio with equal weights that
included RMB/GBP and NZD/GBP displayed a maximum daily return of 1.5%, a minimum
daily return of -1.3%, a mean daily return of 0.0007%, a variance of 0.000261%, and a
standard deviation of 0.0161%. The value of the portfolio's correlation coefficient with the
RMB/GBP exchange rate was -0.134, whereas the value of the portfolio's correlation
coefficient with the NZD/GBP exchange rate was 0.443. In contrast to discrete currencies, the
portfolio indicated a lower upper limit on its daily returns, while at the same time displaying
a higher lower limit on its daily returns. This was because the portfolio included many
currencies. The portfolio had an average daily return that was much lower than that of the
RMB/GBP exchange rate, although it was somewhat greater than the NZD/GBP exchange
rate. The variance and standard deviation of the portfolio were found to be lower in contrast
to those of the individual currencies, as stated by Kumar, Stauvermann, and Samitas (2022).
This suggests that the portfolio was less volatile and had a lower risk overall. Both the
portfolio and the RMB/GBP pair have a correlation coefficient that is negative, which
indicates that there is an inverse link between the two assets. On the other hand, a positive
correlation coefficient is shown by both the portfolio and the NZD/GBP pair, which indicates
a direct connection between the two assets. It is possible for fluctuations in one currency to
be counterbalanced by changes in another currency thanks to the diversification effect, which
Page | 6
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plays an important role in reducing the total risk of a portfolio. The discipline of portfolio
theory acknowledges, to a large extent, the benefits of diversification assets over a number of
different currencies. Due to the fact that the assets within an investment portfolio are not
completely connected with one another, diversification of those assets within the portfolio
may lead to a decrease in total risk without sacrificing the returns on those investments. The
explanation for the phenomena is that the fluctuations of one asset may be counterbalanced
by the fluctuations of another asset, which results in a reduction in the total variability of the
portfolio. This is the cause of the phenomenon.
The Sharpe ratio is a widely used indicator that is utilised in many portfolio assessment
methods. This statement provides a quantitative representation of the excess return of a
portfolio in proportion to the portfolio's volatility. According to Kan, Wang, and Zheng
(2022), a greater Sharpe ratio suggests stronger risk-adjusted performance. This conclusion
was reached after doing research. The Sharpe ratio of the evenly weighted portfolio was 0.05,
but the Sharpe ratios of RMB/GBP and NZD/GBP were 0.00 and 0.09, respectively.
According to the statistics, the portfolio had a risk-adjusted performance that was somewhat
better than that of RMB/GBP, but it displayed a risk-adjusted performance that was slightly
worse than that of NZD/GBP. To summarise, it was discovered that reducing the amount of
risk and volatility in a portfolio by giving equal weight to the RMB/GBP and NZD/GBP
currency pairs resulted in a lower level of both volatility and risk when compared to the
individual currencies. The advantages of diversification in terms of risk reduction are shown
by the inverse link between the RMB/GBP pair and the portfolio, as well as the direct
relationship between the NZD/GBP pair and the portfolio. According to the findings that
were obtained through the application of the approaches for evaluating portfolios, the
portfolio demonstrated a risk-adjusted performance that was marginally better than that of the
RMB/GBP pair, but it exhibited a risk-adjusted performance that was somewhat worse than
that of the NZD/GBP pair.
Part C:
Researchers created a portfolio with equal weights for RMB/GBP and NZD/GBP. Portfolio
risk and performance analysis. Researchers examined portfolio currency pairings. Globally
important FX pairs: RMB/GBP and NZD/GBP. RMB/GBP is the yuan-to-pound rate,
whereas NZD/GBP is the New Zealand dollar-to-pound rate. Traded pairs vary in volatility
and correlation. Researchers created portfolios using currency pairings. RMB/GBP and
Page | 7
NZD/GBP portfolio. Risk-tested portfolio. Stress, backtesting, scenario analysis. Portfolio
performance is backtested. Analysing portfolio performance revealed strengths and
limitations. Market extremes challenged portfolio resiliency. Scenario analysis evaluates
portfolio performance in different markets. Portfolio currency pairings were analysed.
RMB/GBP and NZD/GBP correlation and volatility affected portfolio performance. Diversify
portfolio to lower risk and boost performance. Assessed currency and portfolio risk and
return. Daily returns, max/min returns, mean, variance, standard deviation, covariance,
correlation coefficients, and coefficient of variation were measured. 9 words Currency and
portfolio risk and return were assessed.
Portfolios were reviewed to aid currency fund managers. Currency developments, volatility,
and hazards are examined. Indicators assist fund managers evaluate currency investments.
Portfolio analysis addresses economic and political aspects affecting currency performance.
Currency and portfolio managers are affected by external forces (Jeribi and Fakhfekh, 2021).
Portfolio analysis aids competitive currency fund managers. Fund managers may analyse data
instead of intuition. Understand currency and portfolio risk and return. Smart investing
reduces risks and boosts earnings. Currency fluctuations affect worldwide investments. Pre-
investment currency risk and return evaluation. Inflation, interest rates, and political stability
may be examined. Portfolio risk and return matter. Portfolios include stocks, bonds, and
currencies. Diversification may be assessed by assessing portfolio risk and return. Smart
investors know currency and portfolio risk and return (Saksonova and Kuzmina-Merlino,
2019). Analysing factors helps investors increase profits and reduce global economic dangers.
Fund manager diversifies currencies by examining sample performance. Currency research
helps managers boost profitability and reduce risk. The fund manager may employ several
currencies to construct a robust investment strategy that adapts to market fluctuations and
produces reliable returns. Portfolios need currency diversification. Investors achieve
objectives through reducing risk and boosting profits.
Having a portfolio of firms and industries may help spread risk and increase potential gain.
Diversification increases the profitability of investments. The variance in portfolio returns is
lower than that of currencies. 9 words The more you spread your investments across, the less
vulnerable you are. Fund values tend to be more stable than currency values. Currency risk
may be mitigated by diversification. Diversification is useful for investors. Compared to
currencies, portfolios did better.
Page | 8
There are limits to analysis, and limited results. Data analysis may be restricted. For proper
analysis, one needs accurate data. The correctness of the data influences the analysis. The
analysis is restricted by methods and presumptions. The findings are influenced by the
methods and assumptions used. The analysis is restricted by expertise. Inexperienced analysts
are susceptible to making errors (Ehlers and Gauer, 2019). The use of analysis in decision-
making is helpful, but its limits should be recognised and additional sources should be
explored. It's possible that one year doesn't accurately reflect currency risk and return.
It is possible for someone to disregard market conditions that have an effect on the currency.
Market trends may not endure. Be cautious of the sample period when evaluating the risk and
return associated with currency fluctuations. The study of the portfolio assumed that the
currencies were weighted equally. Currency weights in a portfolio are determined by risk as
well as goals. Fund allocation is determined by diversification as well as results. Portfolio
allocation is determined by the investor's goals and their level of comfort with risk. The
currency weights of a portfolio are determined by its investment goals. User analysis
demonstrates the performance of the currency portfolio; nevertheless, aspects pertaining to
fund allocation should be examined. Investors may choose a diverse portfolio by considering
their fund management objectives as well as their risk tolerance.
Analysis missed key currency considerations. Transaction fees not included, affecting
investment profits. Unconsidered liquidity and geopolitical factors may affect currency
performance. Transaction expenses diminish high-frequency trading profitability. Cost-based
currency analysis (Dargin, 2022). Liquidity influences currency trading. Liquidity issues may
damage trade, causing lost opportunities or disadvantageous pricing. Geopolitics influences
currency. Sanctions or instability may devalue currencies. Keep abreast with currency-related
happenings. In conclusion, the study is useful, but all relevant elements that might affect the
investment should be considered. Transaction costs, liquidity, and geopolitical events may
improve investment choices and returns. Untracked rate fluctuations affect international
investment returns. Mistakes hurt investments. Exchange rates effect investor profits. Politics,
economics, and market emotion affect variations. Hedging reduces currency risk. Ignoring it
might cost you. Investors must handle exchange rate risk.
More analysis may improve examination. There needs to have more data to comprehend the
topic. Interpreting findings requires further analysis. Sensitivity analysis tests how variable
changes impact portfolio performance. Analytical methods or data sources may be needed.
Currency weight is a portfolio variable (Goo and Heo, 2020). Currency weights indicate
Page | 9
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portfolio performance changes. Analysts examine currency weight sensitivity. Create a
spreadsheet portfolio, and alter currency weights to assess performance. To do this, modify
currency weights or portfolio allocation. Sensitivity analysis optimises portfolios. Analysts
may alter the portfolio if currency weight increases performance. Analysts may eliminate
portfolio-harming currency weights.
Sensitivity analysis clarifies portfolio performance variables. Currency weights help portfolio
management and investing goals. Transaction expenses may dramatically impact portfolio
performance. Transaction costs improve portfolio analysis. Securities trading incurs
transaction expenses. Fees, commissions, and taxes are expenses. Transaction expenses
impact portfolio returns. Transaction expenses help investors calculate portfolio returns.
Important for stock traders. Neglecting transaction expenses boosts portfolio performance.
Transaction costs enhance portfolio analysis and investment choices. Transaction costs aid
investment strategy evaluation. Transaction expenses affect portfolio performance. Returns
inform investors. Geopolitics and currency volatility affect currency performance. Politics,
economics, and world events affect currency value. Experts examine currency variables. Data
analysis informs investors and traders. Investors may reduce risk and optimise rewards by
understanding how geopolitics and exchange rates affect currency prices (Bazán-Palomino
and Winkelried, 2021). This study helps multinationals manage currency risk. Experts use
statistical models, trend analysis, and scenario planning. These tools let researchers identify
currency trends and simulate global events and exchange rate changes. The financial
industry's currency success depends on geopolitical developments and exchange rates. For
decision-making and risk management, experts study data.
The research analysed RMB/GBP and NZD/GBP fund manager portfolios. Currency
investment was assessed. Results help fund managers invest better. Assessed portfolio risk
and return for RMB/GBP and NZD/GBP currencies. Using diverse instruments and
approaches, the research examined currency performance over time. Currency volatility,
correlation, and trends were examined. RMB/GBP and NZD/GBP currencies have different
risk and return levels. The study finds RMB/GBP riskier than NZD/GBP. RMB/GBP
outperformed NZD/GBP. RMB/GBP and NZD/GBP fund managers should weigh risk and
return. Diversify portfolios to reduce risk from investing in one currency pair, suggests study
(Qarni and Gulzar, 2021). This study examines RMB/GBP and NZD/GBP currencies for
investment insights. The study aids fund managers in diversifying portfolios and making
informed investments. The author stresses diversifying investments in currencies. Lowering
Page | 10
risk and increasing returns benefits investors. Diversifying currency investments reduces
currency fluctuation’s impact on the portfolio. Investing in different currencies can enhance
portfolio diversification and strength by providing exposure to diverse economies and
geopolitical factors. Diversify currency holdings for better investment strategy, says the
author. Limitations in user analysis may impact the accuracy and completeness of findings.
Further analysis is required to comprehend currency risk and return. Analysis may involve
studying economic and political factors affecting currency values and exploring historical
trends. Studying cryptocurrencies can help researchers grasp their potential benefits and
drawbacks. This data helps investors make investment decisions and allocate resources.
Conclusion
Investors in the RMB/GBP and NZD/GBP currency pairs may benefit greatly from the results
of the portfolio analysis conducted here. The advantages of currency diversity may be
assessed by the fund management by looking at the risk and return characteristics of each
currency. The research emphasises the potential advantages of diversity, such as lower
portfolio risk and greater returns. The research has certain caveats, such as its small sample
size and the fact that it presumes a balanced portfolio of currencies. Additional research on
the risk and return characteristics of various currencies, including transaction costs, liquidity,
geopolitical events, and exchange rate movements, is required so that investors may make
better-informed judgements. Fund managers who are interested in investing in these
currencies would do well to consider this study as the first step towards a fuller investigation
of the market.
Page | 11
References
Bazán-Palomino, W. and Winkelried, D., 2021. FX markets’ reactions to COVID-19: are they
different?.
International Economics
,
167
, pp.50-58.
Chen, B., Zhong, J. and Chen, Y., 2020. A hybrid approach for portfolio selection with
higher-order moments: Empirical evidence from Shanghai Stock Exchange.
Expert Systems
with Applications
,
145
, p.113104.
Dargin, J., 2022.
Energy sector development and carbon abatement challenges in Saudi
Arabia, the United Arab Emirates, and Qatar
(Doctoral dissertation, University of Oxford).
Dassanayake, W., 2022. Critical comparison of statistical and deep learning models applied to
the New Zealand Stock Market Index.
Ehlers, S. and Gauer, K., 2019. Beyond bitcoin: A statistical comparison of leading
cryptocurrencies and fiat currencies and their impact on portfolio diversification.
The Journal
of Alternative Investments
,
22
(1), pp.114-125.
Goo, J.J. and Heo, J.Y., 2020. The impact of the regulatory sandbox on the fintech industry,
with a discussion on the relation between regulatory sandboxes and open innovation.
Journal
of Open Innovation: Technology, Market, and Complexity
,
6
(2), p.43.
Gupta, B.B., Agrawal, D.P. and Yamaguchi, S., 2019. Deep learning models for human
centered computing in fog and mobile edge networks.
Journal of Ambient Intelligence and
Humanized Computing
,
10
, pp.2907-2911.
Jeribi, A. and Fakhfekh, M., 2021. Portfolio management and dependence structure between
cryptocurrencies and traditional assets: evidence from FIEGARCH-EVT-Copula.
Journal of
Asset Management
,
22
(3), pp.224-239.
Kan, R., Wang, X. and Zheng, X., 2022. In-sample and out-of-sample sharpe ratios of multi-
factor asset pricing models.
Available at SSRN 3454628
.
Kumar, R.R., Stauvermann, P.J. and Samitas, A., 2022. An Application of Portfolio Mean-
Variance and Semi-Variance Optimization Techniques: A Case of Fiji.
Journal of Risk and
Financial Management
,
15
(5), p.190.
O’Meara, M.S. and South, S.C., 2019. Big Five personality domains and relationship
satisfaction: Direct effects and correlated change over time. Journal of personality, 87(6),
pp.1206-1220.
Page | 12
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Qarni, M.O. and Gulzar, S., 2021. Portfolio diversification benefits of alternative currency
investment in Bitcoin and foreign exchange markets. Financial Innovation, 7(1), pp.1-37.
Saksonova, S. and Kuzmina-Merlino, I., 2019. Cryptocurrency as an investment instrument
in a modern financial market.
Вестник Санкт-Петербургского университета.
Экономика
,
35
(2), pp.269-282.
Page | 13
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