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 [Quantlib-jobs] Homework problems involving Chinese currency From: Joseph Wang - 2005-07-22 06:56:37 ```Now that the renminbi has been de-pegged from the dollar, let me suggest some homework problems which might be possible using quantlib :-) :-) :-) 1) Chinese currency is now fixed to a secret basket of currency. Derive a model which allows you to figure out what that secret basket of currencies is. It should be a simple matrix inversion problem, but the problem is that if you have small time series, then you get a singular matrix. If you have long time series, you end up with the possibility that the basket mix is changing. So there it becomes an interesting signal processing. This model becomes especially useful if it can throw up a red flag (pun intended) if the currency mix has changed. 2) Using the model in 1) derive a model for that predicts the future value of the RMB. The easy part is to simulate assuming log-normal behavior in the currency basket values. The hard part is the model the fact that the rules of the game are made by the People's Bank of China and they can change them. 3) Identify clever profit opportunities using some of the details of the rules of the new scheme. For example, the RMB is to be revalued once a day. You could use the model you develop in step 1) to arbitrage intra-day fluctuations in the basket of currencies. Also the rule that the currency is going to only fluctuate within 0.3% of the previous days value is "interesting" 4) Using 2), develop derivative securities that will let you hedge or speculate on the value of the RMB. Price that security. You must take into account capital controls in and out of the PRC. These securities will likely be akin to Non-deliverable swaps and non-deliverable forwards. Example: Create a clever barrier option that separates out the risk due to "normal" currency fluctuations from the risk due to PBC intervention. 5) Create a models that: 5a) take into account correlations between the RMB and other currencies. Figure out ways of time arbitrage 5b) take into account correlations between the RMB-US exchange rates and interest rates both in US treasuries and in PRC domestic interest rates 6) Comment on the public policy big picture consequences of the above. Identify feedback cycles which are potentially destablizing to the world economic system. I'll be working on 1-6 in my spare time over the next few weeks. The reason that I'm posting to quantlib-jobs is that on my list of homework problems is 7) Convince someone that it is worth paying me to work on problems 1 to 6.... :-) :-) :-) :-) ```

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