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Issue Set: Backtesting the Carry Trade (Macro Strategies)

Prof. Andrea Frazzini

In this trouble set, you backtest the currency hold trade making use of the data presented in the associated Excel schedule. You can do the challenge set employing Excel or any type of other software of your choice. You should answer inside the space provided (no a lot more than three webpages for concerns 1-6).

1 ) For each month of the test, rank the countries depending on their interest rate (hint: Excel has a function called " RANK(cell, selection, 1)”). Figure out each country's average rank (1=lowest interest rate, etc . ). Which two countries have the cheapest average rank, and that have the highest:

Usually " funding currency” (i. e. low interest-rate):

Second to most generally funding foreign currency:

Most often " investment currency” (i. elizabeth. high interest-rate): Second to most often expenditure currency:

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Storyline here the rank with the US after some time:

2 . Produce positions for each and every currency, both $1 (long), $-1 (short), or zero (flat). Do that by heading short three currencies together with the lowest interest rate, and long the three together with the highest rate of interest. (Hint: you can utilize the Excel function " IF” twice, one inside other: " = IF( cell = 7, one particular, 0) ) ”.

What is the average situation in Fresh Zealand:

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3. Compute the excess go back on each situation, and add these kinds of up to find the excess go back of the entire portfolio in different month. Be sure to get the time right. (Hint: use SKEW and KURT, and annualize as in records. )

What is the annualized average excess return in the portfolio: What is the annualized standard deviation:

What is the skewness of monthly earnings:

What is the (excess) kurtosis of month to month returns:

Precisely what is the annualized SR:

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Comment on these types of numbers:

5. For each foreign currency, compute the trade monthly,...