International Finance


A change in exchange rate through its effect on the costs of inputs, outputs, and
substitute goods affects the competitive position of domestic companies with no
direct international involvement relative to foreign corporations. The financial
literature focuses on the effect of oil price changes on stock returns, economic
growth and some macroeconomic variables, however the literature is still not
inclusive about the effect of oil price changes on financial variables, more
specifically the value of the firms. Furthermore, academics, policymakers, and
practitioners have frequently discussed the link between oil prices and exchange
rates in recent years- particularly the idea that an appreciation of the US dollar
triggers a dip in oil prices. However, the empirical evidence on the impact of
exchange rates and oil price changes on firm value is not conclusive which is
surprising in view of the considerable fluctuations in both exchange rate and oil
prices over the last 40 years. The review of relevant literature reveals that
previous studies neglect the potential role of financial crises in affecting the
relationship in question. In addition, some economists suggest that exchange
rate exposures are not constant over time, instead they are time varying. Many
previous studies separate the whole sample period into some sub-periods.
Countries form different exchange rate treaties to well manage the adverse
effects of exchange rate fluctuations. In addition, the literature to date indicates
that exchange rate exposure varies across industries.
Pick up a sample of companies from a specific country (at least 30 companies).
The sample should include two sub-samples: the first is financial and the second
is nonfinancial. As financial companies have different characteristics please
analyse them separately. The required data should include: Daily, weekly or
monthly share prices, national stock market index (e.g. FTSE100, DOW30,
NASDAQ, S&P500, DAX30, CAC40, EGX100 etc.) crude oil price index (WTI)
and relevant exchange rate rates (Trade Weighted (TW) if available; if not
bilateral exchange rates e.g. AUS$/US$ will be used). The data should cover the
period between 15th December 1999 and 15th Dec. 2017. The data for exchange
rates, national market indexes and stock prices can be obtained from
DataStream, Bloomberg and Yahoo Finance. In addition, crude oil prices (WTI)
can be downloaded from:
The following time-series regression model can be used:
Rit = αi + β1iERt + β2iRMt + β3iOILt + eit

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Rit is the stock return for the firm i, over time period t, αi is the intercept term for
firm i, β1i, β2i and β3i are the foreign exchange rate exposure coefficient, market
exposure coefficient, and oil price changes coefficient respectively. ERt is the
percentage change in exchange rates over time period t, RMt is the rate of return
on the market index, OILt is the oil price changes and eit is the random error term
for firm i in period t. The sign of the coefficients indicates the direction of
individual firm exposure. Significant positive (negative) sings of β mean that firm
values increase when exchange rates/oil prices/market returns increase
You are required to
a) Estimate the exposure of the sampled companies to the exchange rate risk
market risk and oil price as follows
i. Pre-2008 CRISIS sub-period (15th January 2000
 to 15th December 2006,
ii. During-2008 CRISIS sub-period (15th January 2007 to 15th December
iii. Post-2008 CRISIS sub-period (15th January 2010 to 15th December 2017).
iv. Discuss your results and comment on the exposure coefficients in the
above different sub periods. You need to explain what is the exchange
rate, market and oil price exposure of the sampled companies before,
during and after the 2008 crisis?
(80 marks)
b) Compare and contrast your results with previous studies in the area
explaining similarities and differences.
(20 marks)
(Word limit: 2500 words or 10 pages)
You should show all workings. Summarize the results in tables. Please do
not include the raw data in the text.
● e-Submission: on 20th March 2018. Please upload it on MOODLE. When you
upload the assignment, please make sure that the file named as follows:
Module Code- your ID. ACF703- 1234567
● A soft copy should be sent on 20th March 2018 by 3pm to my email. Please
write in the Subject: Module Code- your ID. For example: ACF703- 1234567.
As you will send your assignment as an attachment, please make sure that
the file named as follows: Module Code- your ID.
● The standard rules on plagiarism apply as stated in the module guide.
● This is your own work. It is not a group project.
● This counts for 70% of your module marks

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