Instructor: Natalya Turkovskaya, Phd, Associate Professor

/

MASTER PROGRAMS

Spring Semester
2008/2009

COURSE SYLLABUS

INTERNATIONAL FINANCIAL MANAGEMENT

Instructor: Natalya Turkovskaya, PhD, Associate Professor

Organization of the course

Program / Bachelor program (080500 «Management»)
Year / 4-th year
Course status / Elective
Workload / 6 ECTS, 60 hours of classes
Prerequisites / Financial Management
Teaching methods / Lectures, group work, exercises, presentations, case study, home and class assignments

Course objectives

-  to give a deep understanding of the conceptual framework of international financial environment;
-  to provide theoretical and practical skills of international financial system functioning;
-  to dissect various types of financial instruments, such as currencies, stocks, debt instruments, derivatives, significant for internationally operating companies;
-  to develop basic skills of currencies, underlying securities and derivative instruments trading and valuation.

Course content

Topic 1.Globalization and the Multinational Firm. International Monetary System.
Topic 2. Foreign Exchange Market. Parity Conditions in International Finance and Currency Forecasting.
Topic 3. Balance of Payments and International Economic Linkages. Corporate Governance around the World.
Topic 4. International Banking and Money Market.
Topic 5. International Bond Market.
Topic 6. International Equity Markets.
Topic 7. Futures and Options on Foreign Exchange. Currency and Interest Rate Swaps.
Topic 8. International Portfolio Investments. Management of Transaction Exposure.
Topic 9. Foreign Direct Investment and International Trade Finance.
Topic10.International Capital Structure and the Cost of Capital. Multinational Cash Management.

Plan of classes

Topic 1. Globalization and the Multinational Firm. International Monetary System

Class 1.
Preliminary assignment / Required reading for class:
–  Eun, Resnick: Ch.1, 2
–  Financial crisis tests durability of globalization / Financial Times. October, 10, 2008.
February, 11
14.45-16.15
16.30-18.00
18.10-19.40
Room 506 / Key points:
–  Introduction to the course.
–  Specialties of international finance and goals for international financial management.
–  Definition of globalization and the major trends of the globalized world.
–  The core of multinational corporations and the theory of comparative advantage.
–  Definition of the International Monetary System (IMS), consideration of its evolution.
–  Overview of exchange rate arrangements, its particularities.
–  The current exchange rate arrangements.
–  The Euro and the European Union.
Learning outcomes: Students should be able to:
–  Define the core of international finance and goals for international financial management.
–  Perceive the basic trends of globalization, sense of them for multinationals.
–  Describe the evolving process of IMS, contemporary currency regimes; give examples of different types of exchange rate arrangements in the contemporary world and express own opinion about merits and demerits of fixed and flexible exchange rate regimes.
–  Explain the features of European Monetary Union, perspectives of its expansion in the international finance.
Assignments for class 2:
Reading:
–  Eun, Resnick: Ch. 5, 6
–  Anne-Marie Gulde. Exchange Rate Regimes for Transition Economies: Were Currency Boards are Efficient Choice? / Report on the Second International Scientific and Practical Conference «Efficient Monetary Policy Options in Transition Economy». May, 19-20, 2008, Minsk.
–  Mini-case: Will the UK join the Euro club?/ Eun, Resnick, p. 57.

Topic 2. Foreign Exchange Market. Parity Conditions in International Finance and Currency Forecasting.

Class 2.
February, 18
14.45-16.15
16.30-18.00
18.10-19.40
Room 506 / Key points:
–  Discussion: exchange rate arrangements for transition economies.
–  Case discussion: «Will the UK join the Euro club?».
–  Definition of Foreign exchange (FX) market, its framework, specialties of functioning.
–  Spot market, cross rates and triangular arbitrage.
–  Forward market. Forward quotations and positions.
–  Forward premium and swap transactions.
–  Interest rate parity (IRP) and the Law of one price.
–  Covered and uncovered interest arbitrage.
–  IRP and exchange rate forecasting: relationships and deviations.
–  Purchasing Power Parity (PPP): core, deviations and the real exchange rate.
–  Fisher effect and international Fisher effect
–  Different approaches of currency predictions in the terms of PPP.
Learning outcomes: Students should be able to:
–  Define the major components of FX market and explain how it operates.
–  Calculate FX spot and forward rate quotations, cross rates, triangular arbitrage, forward premium or discount.
–  Dispute utility of FX forward contracts for international transactions.
–  Reveal and treat in proper way the relationships between different financial indicators – spot and forward exchange rates, interest rates, inflation, real and nominal interest rates.
–  Test empirically whether international parity conditions hold in particular business situation.
–  Use covered and uncovered interest rate arbitrage in practice.
Assignments for class 3:
Reading:
–  Eun, Resnick: Ch. 3, 4.
–  Mini-case: Shrewsbury Herbal Products, Ltd. / Eun, Resnick, p. 130
Individual home assignment №1(deadline – February 24, 18.00):
–  Internet exercise: apply triangle currency arbitrage technique for particular market situation (any market quotations), involving 3 currencies.
Individual home assignment №2 (deadline – March 3, 18.00):
–  Internet exercise: Find an opportunity for covered interest arbitrage in international FX market, using two currencies.

Topic 3. Balance of Payments and International Economic Linkages. Corporate Governance around the World.

Class 3.
February, 25
14.45-16.15
16.30-18.00
18.10-19.40
Room 506 / In-class assignment: Mini-test: Exercises on topics 1, 2.
Key points:
–  Case discussion: « Shrewsbury Herbal Products, Ltd.».
–  Balance-of-payments accounting and its accounts.
–  Balance-of-payments identity.
–  Balance-of-payments tendencies in major countries.
–  Governance of the public corporation.
–  Different types of corporate governance mechanisms.
–  Law and corporate governance worldwide. Corporate governance reform and its consequences.
Learning outcomes: Students should be able to:
–  Describe the balance-of-payments method for the state accounting: its core, goals and instruments.
–  Reveal and treat major trends in balance-of-payments worldwide.
–  Determine the relationship between the macroeconomic indicators and the state of balance-of-payment of a particular country.
–  Explain internal and external corporate governance mechanisms at the multinational.
–  Describe corporate governance models applied in different countries.
–  Find out the relationship between corporate control and equity markets and business efficiency of a company.
–  Illustrate the core and effects of corporate governance reform.
Assignments for class 4:
Reading:
–  Eun, Resnick: Ch. 11.
–  Mickael U. Klein. The international financial crisis. What next for emerging markets? / World Bank. November, 6. 2008.
–  Carmen M. Reinhart, Kenneth S. Rogoff. Banking crises: an equal opportunity menace / NBER, working paper 14587. December 2008. Pp. 19-23, 26-33, 45-46.
–  Ana Gonzalez Ribeiro. Are CDs Good Protection For The Bear Market? / Investopedia. December 2008.
–  Steven Sloan. Fed Gains More Power, But Faces New Problems / American Banker. December, 23. 2008.
–  Mini-case: Mexico’s Balance-of-Payments Problem/ Eun, Resnick, p. 76.
–  Mini-case: Parmalat: Europe’s Enron/ Eun, Resnick, p. 101.

Topic 4. International Banking and Money Market.

Class 4.
March, 4
14.45-16.15
16.30-18.00
18.10-19.40
Room 506 / Key points:
–  Case discussion: «Mexico’s Balance-of-Payments Problem».
–  Case discussion: « Parmalat: Europe’s Enron».
–  Reasons for international banking. Banking services and types of international banking offices.
–  Capital adequacy standards.
–  Eurocurrency market. Eurocredits.
–  Forward rate agreements.
–  Euronotes. Eurocommercial paper.
–  International debt crisis and banking crisis. Debt-for-equity swaps and brady bonds.
–  Discussion of aspects of international banking crisis.
Learning outcomes: Students should be able to:
–  Reveal and treat properly current situation and trends at the international currency markets and money markets.
–  Identify the specifics of international money market instruments, their possible use by multinational companies.
–  Perceive core, causes and consequences of current financial crisis on the whole and for multinationals, interrelate the current financial calamities with certain processes.
Assignments for class 5:
Reading:
–  Eun, Resnick: Ch. 12.
–  Michael Schmidt. Bonds For Every Stage Of Life / Investopedia. 2008.
–  Christina Granville. Spice Up Your Portfolio With International Bonds / Investopedia. 2008.
–  Muhammad al-Bashir Muhammad al-Amine. The islamic bonds market: possibilities and challenges / International journal of islamic financial services. Vol. 3, №1, June 2001.
–  Lahem al Nasser. The Risks Entailed in Islamic Bonds / Asharq Alawsat. February, 6. 2008.
–  Mini-case study: Sara Lee Corporation’s Eurobonds / Eun, Resnick, p.312.
Individual home assignment № 3 (deadline – March 24, 18.00):
–  Essay: Perspectives of the world monetary system. The world without Dollar – is it possible?

Topic 5. International Bond Market.

Topic 6. International equity markets.

Class 5.
March, 11
14.45-16.15
16.30-18.00
18.10-19.40
Room 506 / Key points:
–  International bond markets.
–  Foreign bonds and Eurobonds. Global bonds.
–  Types of bonds.
–  International bond market credit ratings
–  Eurobond market structure and practices. International bond market indexes.
–  Discussion: International bond market. Islamic bonds as an alternative to the western approach to the bond market.
–  Case-discussion: «Sara Lee Corporation’s Eurobonds».
–  International equity markets.
–  Equity market structure and trading practices.
–  International equity market benchmarks.
Learning outcomes: Students should be able to:
–  Describe the structure of the international bond market, specialties of different types of bonds.
–  Read and interpret bond quotations.
–  Identify factors that impact bond prices and yields in international markets.
–  Discuss how bond issues are used in practice for multinationals.
–  Report on structure and trading specificsat the international equity markets.
–  Certain and use in practice international equity benchmarks.
Assignments for class 6:
Reading:
–  Eun, Resnick: Ch. 13.
–  Melanie Wright and Kathryn Cooper. Beat the stock market’s lost decade / The Sunday Times. February 8, 2009.
–  Ali Hussain. Investors buy gold during recession / The Sunday Times. February 8, 2009.
–  Ana Gonzalez Ribeiro. Greenshoe Options: An IPO's Best Friend / Investopedia. November 2008.
–  Jay R. Ritter. Differences between European and American IPO Markets / European Financial Management. Vol. 9, № 4. December 2003. Pp. 421-434.
–  Simeon Djankov. When Will Stocks Rebound in Eastern Europe? / World Bank. January, 22. 2009.
–  Mini-case: San Pico’s New Stock Exchange, p. 335
Group work (to be presented at the class 7)::
–  Analysis of Russian multinational company position at the domestic vs. foreign debt market: process of debt history creation and present situation (company to be specified for each group).

Topic 6. International equity markets (cont.).

Topic 7. Futures and Options on Foreign Exchange. Currency and Interest Rate Swaps.

Class 6.
March, 18
14.45-16.15
16.30-18.00
18.10-19.40
Room 506 / Mid-term exam, based on topics 1-5
Key points:
–  Trading in international equities. Cross-listing of shares.
–  Initial Public Offerings (IPO) worldwide. European stock market. American depository receipts (ADR), Global Registered Shares (GRS).
–  Discussion: Contemporary situation in the international equity market, its consequences and possible remedies.
–  Case-discussion: «San Pico’s New Stock Exchange».
–  Financial derivatives. Foreign currency futures.
–  Differences between futures and forward contracts.
–  Basic currency future relationships.
–  Hedging and speculating with futures.
Learning outcomes: Students should be able to:
–  Explain how international equity markets operate, define cross-listing of shares, features of depositary receipts programs.
–  Investigate a process of company’s IPO abroad, its outcomes for company’s market position.
–  Describe and analyze the situation at the international equity markets.
–  Compare derivative products: futures contract vs. forwards, futures vs. options.
–  Identify how futures could be used for hedging and speculation.
–  Characterize futures trading – futures positions, marking-to-market, margin requirements.
Assignments for class 7:
Reading:
–  Eun, Resnick: Ch. 7, 14.
–  Helen Simon. Are Derivatives Financial «Weapons Of Mass Destruction»? / Investopedia. December 2008.
–  Lilla Zuill. AIG hopes to cover all derivatives with plan / Reuters. December, 10. 2008.
Individual home assignment №4 (deadline –March 31, 18.00):
–  Internet exercise: to explore arbitrage opportunities between local market for company’s shares and ADRs of the company cross-listed for the certain period.

Topic 7. Futures and Options on Foreign Exchange. Currency and Interest Rate Swaps (cont.)

Class 7.
March, 25
14.45-16.15
16.30-18.00
18.10-19.40
Room 506 / In-class assignment: Group presentations on companies’ domestic vs. foreign debt instruments.
Key points:
–  Types of options. Calls and puts. Options positions.
–  American and European options.
–  Option trading. Clearinghouse. Margin requirements
–  Basic option-pricing relationships.
–  Types of swap and swap market quotations.
–  Mechanics of interest-rate swaps.
–  Foreign currency swaps.
–  Interest-currency swaps.
–  Risk and efficiency of interest rate and currency swaps.
–  Discussion on risks and efficiency of derivatives.
Learning outcomes: Students should be able to:
–  Create options trading strategies.
–  Use options and futures for hedging and speculation.
–  Read and interpret futures and options quotations.
–  Apply different options positions.
–  Describe different types of swaps.
–  Choose between alternative derivative instruments of hedging.
–  Create hedging strategy with futures, forwards, options, swaps for a particular multinational.
Assignments for class 8:
Reading:
–  Eun, Resnick: Ch. 8, 15.
Group work (to be presented at the class 9):
–  Investigation of current financial crisis causes in comparison with previous financial crises: general features, specialties, aftermaths, recommendations for a cure (previous crisis to be specified for each group).

Topic 8. International Portfolio Investments. Management of Transaction Exposure.

Class 8.
April, 1
14.45-16.15
16.30-18.00
18.10-19.40
Room 506 / In-class assignment: Mini-test, based on topics 6-7.
Key points:
–  International correlation structure and risk diversification.
–  Optimal international portfolio.
–  The benefits of international. equity investing. International diversification with ADRs, WEBS.
–  International diversification with mutual and hedge funds.
–  International bond investment.
–  Three types of exposure.
–  Forward, options, money market hedges.
–  Cross-hedging.
–  Hedging contingent and recurrent exposure.
–  Lead and lag hedging.
–  Exposure netting.
Learning outcomes: Students should be able to:
–  Explain principles of international portfolio diversification.
–  Select instruments of the international equity and bond markets to compose an international portfolio.
–  Form and run a diversified international investment portfolio.
–  Define transaction exposure in a particular situation.
–  Apply different methods of hedging transaction exposure.
Assignments for class 9:
Reading:
–  Eun, Resnick: Ch. 16, 20.
–  Mini-case: Enron versus Bombay Politicians / Eun, Resnick, p. 419.
Individual home assignment № 5 (deadline – April 9, 18.00):
–  Create a hedging strategy for the importer (exporter) of particular product (assignment to be specified individually).

Topic 9. Foreign Direct Investment and International Trade Finance.