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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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