Part I: 1. Find the most recent ‘Big Mac Index” for your country. Is the currenc

Part I:
1. Find the most recent ‘Big Mac Index” for your country. Is the currenc

Part I:
1. Find the most recent ‘Big Mac Index” for your country. Is the currency of your country
‘over or under valued’ based on this criterion?
2. If your country’s currency moves in the direction of indicated by the “Big Mac Index’,
how do you think this will affect your country’s balance of trade?
Part II:
Your assignment is to use interest rate differences between the US and your country to develop a
regression model to forecast exchange rates, then back test your model. Please see below more
details on your assignment.
1. Obtain monthly foreign exchange rates for the last 70 months
2. Obtain the monthly interest rates from (http://stats.oecd.org/index.aspx?queryid=21762#)
3. Create two data series for 69-70 months. The first series will be change in foreign
exchange rates, the second series will be differences in interest rates (i.e. interest rate in
your country minus US interest rates). Report summary statistics and graph each series.
4. Use approximately 50-55 of your observations and run a regression to find alphas and
betas (as in class).
5. Use your regression estimates to forecast exchange rates for the last 15-20 observations.
6. Compare your forecast to the observed exchange rates. Calculate and graph the “absolute
forecast error” and ‘bias’ as calculated in your textbook and in class.
7. Evaluate your forecast (i.e. bias, forecast error).
8. Repeat steps 1-7 for your country’s currency and one other currency (NOT USD, country
is up to you).

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