Bloomberg Assignment
The Bloomberg assignment is an individual assignment but you can prepare the analysis together with your group members, share data and information, discuss findings, etc. However, the final product, i.e., its presentation, the interpretations, and the discussion of the analysis, needs to be a personal product.
The requisite data is daily and should go back five years, i.e., it should run from March or October five years ago (T − 5) to April or November of this year (T ) depending on the semester (spring or fall). All the calculations can be carried out either in Bloomberg or by downloading the data and using Excel depending on your preferences. Depending on the mode of instruction, submission will be either in electronic format only for online courses or hard copy and electronic version for on-campus courses.
Please choose any two of the four questions below. Note that questions 2 and 3 are less data and computationally intensive than questions 1 or 4. You can earn additional credit by submitting more than just two questions. Good luck!
1. FX Trading. Liquidity is an issue very much on the minds of traders and market participants 50 ever since the 2007/2008 financial crisis broke. Bid-ask spreads are a good indication of market depth. Being in charge of ultra-high frequency (algorithm) trading at a major hedge fund you wonder about depth in major FX markets.
To this end you will have to download the daily interbank bid and asked FX rates for the last 10 years from Bloomberg.
(a) Find the mean and median daily percentage bid-ask spreads and fill in the tables below: Mean μ (%) JPY/EUR USD/EUR EUR/GBP CHF/EUR
Spot
1M Forward
3M Forward
6M Forward
Median JPY/EUR USD/EUR EUR/GBP CHF/EUR
Spot
1M Forward
3M Forward
6M Forward
(b) Compute the volatility (standard deviation of the daily currency rates of return), build
a third table, and examine the correlation between volatility and bid-ask spreads.
Volatility σ (%) JPY/EUR USD/EUR EUR/GBP CHF/EUR
Spot
1M Forward
3M Forward
6M Forward
Correlation ρ (μ, σ) JPY/EUR USD/EUR EUR/GBP CHF/EUR
Spot
1M Forward
3M Forward
6M Forward
(c) Interpret your findings noting that tighter spreads typically mean higher liquidity. Other factor influencing spreads are risk (volatility) and volumes, which you can download from http://www.bis.org/publ/rpfx16.htm. The higher the volatility, the more risk the trader (market maker) faces and the more reluctant she becomes offering a quote. Work out what this mechanism implies for FX rate volatility and its correlation with spreads.
What do you observe?
2. Stock and Currency Markets. Examine the comovement of major stock markets and 50 currency pairs. You focus on the 10 most important stock exchanges by market capitalization and liquidity (turnover): NYSE, NASDAQ, London Stock Exchange, Tokyo Stock Exchange, Toronto Stock Exchange, Shanghai Stock Exchange, Shenzhen Stock Exchange, Hong Kong Stock Exchange, Euronext, and Deutsche B ̃orse.
(a) Compute the daily (banking day) return correlations of the various stock exchange com- posite indices and present your results in a diagonal 10×10 matrix.
(b) Compute the daily (banking day) correlations between the major currency pairs (EUR/USD,
USD/JPY, GBP/USD, USD/CHF, USD/CAD, USD/CNY) and the S&P Global 1200,
S&P 500 (NYSE and NASDAQ), CSI 300 (Shanghai and Shenzhen), TOPIX, FTSE 100,
Euronext 100, and the DAX. Present your results in 6 (FX pairs) x 7 (stock indices)
matrix.
(c) Discuss your finding and offer explanations for the observed phenomena.
3. International Portfolio Diversification. Another problem that you encounter in your 50 new position is linked to outdated perceptions of diversification. From your predecessor, a somewhat old-fashioned portfolio manager who did not believe in either statistics or diversifi- cation, you inherited a curious international portfolio consisting of only four, equally weighted subportfolios of stock indices, i.e., each making up 25% of the overall portfolio:
Market Return Forecast μi (%) Risk Estimate σi (%)
S&P 500, US
FTSE 100, UK
TOPIX, Japan
Euronext, EU
(a) Complete the above table.
2
(b) Given the previously computed correlations, calculate the expected risk (standard devi- ation) and return (mean) of the portfolio.
(c) In light of your analysis of the comovement of stock returns and FX returns across
markets what do you expect for the future of your portfolio? Under what scenario
would you expect correlations to rise so dramatically across markets?
4. Carry Trade. Since the financial crisis broke about 10 years ago your hedge fund has had a 50 number of very important carry trades (uncovered interest arb). Typically, you would fund yourself in the JPY at LIBOR and then roll 3M or 6M investments in USD or EUR investing the funds at LIBID. Assuming a start date in March 2007 download the requisite LIBOR and LIBID data together with the JPY/USD bid-ask FX data which is missing from Bloomberg given that you should already have the necessary 5Y of JPY/EUR bid-ask spread. In the analysis, you carefully distinguish between borrowing and lending rates and bid-ask currency quotes and use the necessary formulae taking into account those spreads, i.e., transaction costs.
(a) Looking back, you wonder how profitable the two carry trades were. Did the maturity horizon matter? Provide details on your strategy and instruments to implement the carry trades, how you roll it (over), and what the gains and losses would have been.
(b) Tabulate a distribution of gains and losses for the 3M and 6M maturities. Do they look anything like a normal distribution?
(c) Evaluate the risks. You are particularly concerned about the American financial crisis
and the European debt crisis. Focus on profitability in JPY/USD carry trades from 2008 to 2010 and JPY/EUR ones from 2010 to 2012.
