#2051190-0805-Assignment-INFORMATION ON FINANCE OF INTERNATIONAL

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MBA7006 Finance of International Business Student ID:
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