trading project
Paper details:
Term Project: The goal of the project is to place you in the position of currency traders and portfolio
managers. Using macroeconomic and exchange rate models taught in this course you must analyze
current events in the economy and financial markets with the aim of constructing a portfolio of
currencies. Economic theory can yield trading strategies for assets. Your task is to link theoretical models
with practical action. Each student will manage an imaginary amount of capital which will be invested
in currencies and stocks. All trades should happen in the spot market. The amount of capital to be invested
is one million Canadian dollars.
A report must be submitted at the end of the term describing the overall strategy and reasons for specific
investments. Events that trigger key trades and portfolio shifts should also be described in the report.
Explain why your stock price and currency value change over the term. Stock and currency holdings
must be liquidated by the end of the term and the proceeds converted back to Canadian dollars. Report
any trading profits/losses in Canadian dollars. Excluding references the report should be no more than 3
single spaced pages in length. It is possible to obtain capital gains by trading stocks and currencies at
high frequency. The goal is keep informed of price movements in financial markets to ensure the best
possible trades. To make the project manageable write up the reasons for trades and the results as they
occur instead of waiting until the end of the course to compile results.
Ideally you should buy a currency and a stock priced in the currency. Trades can be more interesting
when you buy a currency with an associated stock although pure currency trades are fine. With pure
currency trades two currencies should be traded. Investment in Canadian stocks is permitted but If you
buy a Canadian stock make sure the company is an exporter so it encounters exchange rate risk, then
discuss how currency risk affects its profits. You must still predict and explain currency movements in
this case by buying the currency that affects its profits. For more information on trading Canadian
companies see the Project Advice file discussed below. You might also buy the Canadian company on a
foreign stock exchange to encounter exchange rate risk. Mining companies certainly meet the criteria for
buying a Canadian company. You may ignore Canadian companies, focusing on foreign stock markets
to confront currency risk linked to equity investment.
The grade will be determined by the quality of analysis rather than overall profitability. The point is to
apply economic models taught in the course to predict exchange rate and stock price movements then to
explain actual movements. Macroeconomics affects asset prices so the objective of the project is to use
exchange rate models to construct investment portfolios. When a trade generates a loss the goal is to
explain why it happened using the models. For instance, suppose the release of economic data causes
depreciation of a currency you are holding with an implied Canadian dollar loss. Explain why the data
caused the depreciation and why this did not conform to previously held expectations. Also explain why
events affect profits of the corporation you are holding with implications for its share price. High quality
analysis will generate a high grade. A sample of the kind of analysis required is found on Quercus in the
trading project file, see eco365trade2021.pdf. which may be found in the trading project folder.
Remember this course is about macroeconomics and exchange rates. Motivating foreign stock purchases
with both microeconomic and macroeconomic factors is fine. But give detailed attention to explaining
movements of the currency in which your asset is priced. Pure currency trades unsupported by stock
investment are permitted. You can use models taught in eco365 to motivate pure currency trades. A stock
trade may also be justified by examining potential capital gains on the currency in which it is priced. Do
not just motivate purchases of the stock and currency. It is more important to explain why the stock price
and exchange rate change. Short selling stocks is permitted but you must buy the shorted stocks back by
the end of trading to calculate profit. For more suggestions look at the file called project advice 2021
which is found in the trading project folder. We will also hold a meeting about the project via Zoom.
Both the meeting and project advice file contain essential information for doing well.
Stock and Foreign Exchange Quotes: There are several websites useful for accessing financial quotes
free of charge. You are free to find your own sites as well.
1. Exchange Rate quotes are accessed via The Bank of Canada (bankofcanada.ca/rates/exchange/). Select
the Daily Currency Converter. Select the foreign currency in the box marked “From”. Select the Canadian
dollar in the box marked “To” and press the box marked “Convert” to obtain the Canadian dollar price
of the foreign currency.
2. Stock quotes:
a. Nasdaq quotes (www.nasdaq.com/): Select “quotes” and key in the stock symbol or company name in
the search box to access a quote.
b. finance.yahoo.com. Type the stock symbol or company name into the “search finance” box to access
a quote. This can be used for NYSE stocks.
c. Toronto Stocks (Get Quotes-TMXmoney): There is a box where you can enter the company name or
stock symbol to access a quote.
d. London stock quotes: londonstockexchange.com lists companies quoted on the London Stock
Exchange alphabetically and provides price quotes free of charge.