INTERNATIONAL MONEY AND CAPITAL MARKETS

INTERNATIONAL MONEY AND CAPITAL MARKETS

M31513

The Intended Learning Outcomes of the Assignment are:

· Understand international investing and the benefits of diversification.

· Portfolio performance evaluation techniques

· Value-at-Risk.

· Understand term structure models of interest rates.

· Spot and forward rates

Assignment

1(i) Using the following information about US and UK market returns and beginning of period $/£ exchange rates:

Period US Return UK Return $/£ Exchange Rate

1	8%	6%	$2.00
2	14	2	1.80
3	2	−4	1.80
4	11	8	1.70
5	14	17	1.60
6	5	6	1.60
7	−	−	1.90

(a) Compute the average return in each market from the standpoint of a US investor and from the perspective of a UK investor. [5 marks]

(b) What is the covariance of the domestic market and exchange rate returns from the standpoint of each investor? [10 marks]

(c) What is the standard deviation of return for each market from the standpoint of each investor?

[5 marks]

( ii) Write notes on the following returns techniques available for assessing portfolio performance and explain how they are used. [15 marks]

(a) Sharpe’s measure

(b) Treynor’s measure

(c) Jensen’s alpha measure

(d) Why is Jensen’s alpha generally preferred over the other alternative measures of Sharpe and Treynor for assessing portfolio performance? Explain in detail. [15 marks]

( 2 | P a g e )

2 (i) How is value-at-risk (VAR) used to measure portfolio performance? Is this concept useful in the approach to portfolio risk assessment? [10 marks]

(ii) The risk management team of Planet Capital believe that the firm’s €100,000,000 stock portfolio will have a 10 per cent return standard deviation during the coming week and that its portfolio’s return is normally distributed.

(a) What is the probability of Planet Capital losing €10,000,000 or more? [5 marks]

(b) What is the euro loss expected with a 5 per cent probability? [5 marks]

(c) What is the euro loss expected with a 1 per cent probability? [5 marks]

3. Explain why it is important to have an understanding not only of the market forces driving observed nominal interest rates but also the characterisation of the random nature of interest rates. [15 marks]

(Hint explain the stochastic process as defined in interest rate models)

4. (a) The following spot interest rates for maturities of one, two, three and four years are currently observable in the market:

r1  4.3% ,

r2  4.9% ,

r3  5.6% , r4  6.4%

Compute the forward rates for f1,1, f1,2, and f1,3, where f1,n refers to a forward rate for the period beginning in one year and extending for n years. [5 marks]

(b) Based on the spot rates in 4(a), and assuming a constant real interest rate of 2 per cent, what are the expected inflation rates for the next four years? [5 marks]

Assignment Guide

The answer to the questions should draw on the assigned chapters, along with the related reading, which requires an explanation of portfolio performance evaluation techniques and their usefulness. The answer is expected to assess their appropriateness and benefits and, where appropriate, draw on the related literature to support the central argument(s). Other parts of the assignment require a good summary of the utility of Value-at-Risk, and term structure interest rate models in determining the short rate.

Useful References

Bodie, Z., Kane, A. and Marcus, A. (2021), Investments (12th ed) McGraw-Hill.

Bekaert, G. and Hodrick, R. (2018), International Financial Management. Cambridge University Press. Moosa, I. (2010) International Finance, McGraw-Hill

Levy, H. and Sarnat, M. (1970) International Diversification of Investment Portfolios, The American Economic Review, 60, 668- 675.

Solnik, B. (1974) Why Not Diversify Internationally? Financial Analyst Journal: 20, 48-54.

Cox, J., Ingersol, J. and Ross, S. (1985) A Theory of the Term Structure of Interest Rates, Econometrica, 53, 385-407.

Cox, J., Ingersol, J. and Ross, S. (1981) A Re-examination of Traditional Hypotheses About the Term Structure of Interest Rates, Journal of Finance, 36, 769-799.

Vasicek, O. (1977) An Equilibrium Characterization of the Term Structure, Journal of Financial Economics, 5, 177-188.

Formatting

The work should be word processed. Font size should be between 12 and 14 and ‘easy to read’ e.g. Calibri, Arial, Times New Roman. Line spacing should be between

1.5 and 2 with (approx.) 4 cm margins all round. The Header must include the student number and the Footer must include a page number. There are no extra marks for excessive presentation; for example elaborate graphics on the cover sheet.

Referencing Requirements

All sources should be acknowledged and appropriately cited within your work, following the University's approved referencing conventions [APA 6th ed.]. For further guidance see: http://referencing.port.ac.uk/

Referencing is required to give intellectual credit to your source, help your reader recover your source easily and to avoid being accused of plagiarism.

Students are reminded that the University will not tolerate academic dishonesty in any form. This is cheating. For further guidance see Student Handbook pages 8 and 9:

http://www.port.ac.uk/accesstoinformation/policies/teachingandlearning/filetodownloa d,73452,en.pdf

Please include a Reference List of all items cited in your work and follow this with a Bibliography to show your wider background reading.

Plagiarism

Students are reminded of the need to avoid plagiarism in all assessments. The definition of plagiarism includes claiming somebody else’s work as your own, for example through inadequate referencing of sources of material used (including Internet sources). Direct quotations must be enclosed in quotation marks and referenced. Using other people’s ideas requires a reference even if it is not a direct quote. The University Regulations describe plagiarism as:

the incorporation by a student in work for assessment of material which is not their own, in the sense that all or a substantial part of the work has been copied without any adequate attempt at attribution, or has been incorporated as if it were the student’s own when in fact it is wholly or substantially the work of another person or persons.

Any student suspected of plagiarising will be referred to the PBS Student Assessment and Assessment Regulations Lead and an Academic Misconduct Hearing will be arranged.

If any student has a query about any of the above matters and wishes to obtain clarification or further information please contact the unit co-ordinator or your personal tutor.

Marking and Feedback

Marking will be done in accordance with the marking criteria grid below (Table 1) and the University of Portsmouth grading criteria for PG level 7 (Table 2). Marks and feedback will be available by MONDAY 8 MAY 2023. Marks will be posted on the Student Portal, and your marked coursework and tutor’s feedback will be available to you once it has been marked and processed. If there is any delay in the processing of marks, the unit co-ordinator will communicate this to you and make arrangements for the marks to be posted on Moodle so that you receive them as soon as they are ready.

Individual feedback will be provided on feedback sheets. These sheets will highlight the strengths of the work and identify development points to help you to work out where you went wrong and how you can improve your performance in the future.

Table 1: Marking Criteria – Essay Type

Component and Suggested Marks	Failure < 40%	Pass 40 – 55%	Good Pass 56 – 69%	Distinction >70%
Introduction and background to topic	Limited introduction not focussed on aims of assignment	Topic well focussed but introduction and context incomplete	Introduction clearly expressed; context well defined	As for good pass
Understanding of key issues	Minimal understanding of key issues	Main issues largely identified, but some lack of focus	All issues clearly understood, with some differentiation in terms of importance	Issues clearly understood and differentiated in terms of importance
Evidence of reading and/or choice of appropriate concepts	Little evidence of reading or limited /inappropriate use of module material; unclear theoretical framework; important work uncited or key concepts ignored	Evidence of reading or appropriate use of module material but with some gaps. Literature /concepts adequately but not critically reviewed.	Good critical literature review or well-justified choice of module material. Theoretical framework supports study.	Demonstrates high level of scholarship.
Analysis	Largely descriptive; practically no analysis of central issues. Qualitative or quantitative data analysis inaccurate.	Some critical analysis of central issues, but with some inaccuracies.	Relevant and full analysis	Comprehensive and critical analysis of central issues.
Presentation and evaluation of evidence	Some evidence to support arguments but uncritical acceptance of material; poor or incomplete citation; unjustified conclusions.	Appropriate evidence, generally assessed critically; weak interpretation of qualitative aspects; some gaps in linkages between evidence and conclusions.	Full, critical assessment of discriminatingly selected material; some evidence of independent thought	Full, critical assessment of discriminatingly selected material; evidence of independent thought; substantial individual insights evident
Presentation: Structure, clarity, use of grammar, correct spelling	Poor: lack of structure and clarity; grammatical mistakes; inadequate referencing	Reasonably clear presentation; reasonable referencing; few grammatical/spelli ng mistakes	Demonstrates very good communication skills; accurate referencing; very few/no grammatical or spelling errors	Excellent communication skills; accurate referencing; virtually no errors; scholarly, well-organised treatment of material
Attainment of learning objectives	Attainment of few/none of the relevant learning objectives	Attainment of a good majority of the relevant learning objectives	Attainment of substantial majority of the relevant learning objectives	Attainment of nearly all of the relevant learning objectives

Table 2: University of Portsmouth General Grading Criteria for Level 6

	Level 6
80+	As below plus: · Outstanding work – contains accurate, relevant material, demonstrates understanding of complex subject matter and is able to view it in a wider context. Shows originality and confidence in analysing and criticising assumptions, is aware of the limits of knowledge. Likely to add new insights to the topic and approaches the quality of published material. · Evidence of extensive research, uses and presents references effectively. · Outstanding quality in terms of organisation, structure, use and flow of language, grammar, spelling, format, presentation, diagrams, tables etc.
70-79	As below plus: · Outstanding work – contains accurate, relevant material, demonstrates understanding of complex subject matter and is able to view it in a wider context. Shows originality and confidence in analysing and criticising assumptions, is aware of the limits of knowledge. · Evidence of extensive research, uses and presents references effectively. · Excellent in terms of organisation, structure, use and flow of language, grammar, spelling, format, presentation, diagrams, tables etc.
60-69	As below plus: · Very good work – contains most of the information required, is accurate and relevant and demonstrates understanding of the subject matter and attempts to view it in a wider context. Shows some originality of thought with good critique and analysis assumptions, is aware of the limits of knowledge. · Well-researched, good use and presentation of references. · Very good in terms of organisation, structure, use and flow of language.
50-59	As below plus: · Work that attempts to address the topic with some understanding and analysis, key aspects of the subject matter covered. · Research extends to primary sources. Appropriately cited and presented references. · Satisfactory presentation with respect to presentation, organisation, language, grammar, spelling, format, diagrams, tables etc.
40-49	· Adequate work which attempts to address the topic with limited understanding and analysis. · Some research using texts, Internet and key reference sources with reference citation and presentation according to convention. · An attempt to follow directions regarding organisation, structure, use and flow of language, grammar, spelling, format, diagrams, tables etc.
30- 39	FAIL – Anything which is inadequate in most or all of the following: length, content, structure, analysis, expression, argument, relevance, research and presentation. Work in this range attempts to address the question / problem but is substantially incomplete and deficient. Serious problems with a number of aspects of language use are often found in work in this range.
0-29	FAIL – No serious attempt to address the question or problem, and / or manifests a serious misunderstanding of the requirements of the assignment. Acutely deficient in all aspects.

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