Python代写 | B9339 Homework Assignment #1


B9339 Homework Assignment #1

1) (FX carry) In this assignment, you are to investigate FX carry strategies. The Excel spreadsheet
“” contains daily data:
• FX spot rates for the G-10 currencies: EUR, JPY, GBP, CAD, AUD, NZD, CHF, NOK, SEK
(columns B-J). All exchange spot rates are against the US dollar (USD), and they are quoted
in their standard market convention: the “EUR” quote is USD/EUR but the “JPY” quote is
• 1-day returns for each spot rate (columns L-T)
• Interest rates for the G-10 countries (columns W-AP). The interest rates correspond to 1-
month rates (labeled as “… 1M”) and 3-month rates (labeled as “… 3M”)
• Implied volatilities (from the currency options market) for:
o the AUD/JPY spot rate at tenors of 1 week (column AR: “AY1wk”), 3 months
(column AS: “AY3M”), and 6 months (column AT: “AY6M”);
o for JPY/USD at tenor of 3 months (column AU: “JPY3M”);
o for AUD/USD at tenor of 3 months (column AV: “AUD3M”)
• The VIX index (aka the “fear index”, constantly mentioned on CNBC), which is the Chicago
Board Options Exchange’s volatility index and reflects the market’s forward expectation
of 30-day equity volatility (hence the moniker “fear index”).
Use the FX spot and interest rate data to construct carry portfolios that:
i. Are based on all pairs of currencies and on the USD-based basket of currencies;
ii. Are based on the 1-month and the 3-month rates;
iii. Contain 2 and 3 currencies each on both the long and the short sides (for a total of 4
or 6 positions respectively);
iv. Use an equal, a rank-based, and a proportional-to-carry allocation for each position in
the portfolio.
(a) For each of the 24 portfolios you have constructed, clearly state the currencies you are
using and the weights of each position in the portfolio; also, explain how you have arrived
at these choices.
(b) Compare the distributions of the return streams of your carry portfolios. Does one
construction jump out as “better” than the others? Is there a single factor in your
construction that appears to make a bigger difference than the others? Briefly explain if
you think your findings are intuitive or not.
[Note: (i) To “compare” the distributions, it is not enough to say one portfolio produces
more return than another portfolio. You need to compare arithmetic and geometric
returns, other moments of the distributions, drawdowns, and any other properties of the
distributions you think are relevant. (ii) The explanation on the intuition is an open-ended
question: there is no right or wrong answer, as long as your explanation makes sense.]
(c) Select the “best” carry portfolio you have created, and analyze its relationship to the
volatility data in your dataset. Which volatility time-series seems the be the most useful
candidate for a conditioning variable that may help you improve your carry portfolio?
Does your finding make intuitive sense (in terms of underlying assets, tenor, etc.)? In
particular, do the data confirm (for your carry portfolio) the relationship between FX carry
and equity volatility that Jurek describes?
(d) Apply a conditioning scheme of your choice to each of the volatility data to improve upon
the “best” FX carry portfolio you have created in (c). Which of the resulting 6 carry
portfolios emerges as the best one? Is this answer in agreement with (i) what you would
have expected on the basis of your analysis in (c) and (ii) your intuition?
(e) Choose a measure of historical volatility of your choice (e.g. historical volatility of a
particular spot rate, historical volatility of a basket of spot rates, historical volatility of one
of the implied volatilities, historical volatility of the equity market, etc.) and repeat step
(d). Compare the return distribution of your carry portfolio conditional on the measure of
historical volatility you chose to the return distribution of your carry portfolio that
emerged as the best one in step (d). Explain why your finding agrees or does not agree
with your intuition.
[Note: (i) For this step, you need to explain the motivation behind the measure of
historical volatility you are choosing; again, there is no right or wrong answer, as long as
your explanation is compelling. (ii) If you choose to use historical volatility of the equity
market(s), either in the US or worldwide, you will need to download the
appropriate/necessary data; Yahoo Finance is a convenient site that provides such data
with relatively little effort.]
For the purposes of this assignment:
• All “returns” are to be computed as arithmetic returns:
− 1
• Transaction and other costs are to be ignored
• Rebalancing of the strategies is to be done on a daily basis (same time scale as the data


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