APPLIES TO ACADEMIC YEAR 2016/2017

FIN 3524 International Financial Management

Responsible for the course
Håkon Tretvoll

Department
Department of Finance

Term
According to study plan

ECTS Credits
7,5

Language of instruction
English

Introduction
The globalization of world markets over the last couple of decades has greatly increased international trade and capital flows. Few modern industries have been left unaffected by these changes, and understanding the risks firms face when conducting business across international borders has become a key component of a modern business education. Managers responsible for operations in several countries must understand the impact on a firm’s cash flows from changes in exchange rates as well as from differences in interest rates and the prices of goods across these locations.

This course will discuss the economic forces behind exchange rate fluctuations, and the theoretical parity relationships that link exchange rates with interest rates and inflation rates in different countries. We will also discuss the extent to which these relationships hold in practice, and the financial instruments that are available to manage the risks involved in international operations. For both businesses and investors, access to international markets comes with opportunities in addition to risk, and the course will examine the benefits of increased diversification internationally. Finally, globalization has lead to increased integration in the world economy for developing countries. These countries tend to have less developed financial and political systems, and we end the course by considering the risks involved in operating and investing in such locations.

Learning outcome
Acquired knowledge
Students will acquire a good understanding of how to evaluate and manage the risks involved in conducting business in international markets. Specifically, the students will develop their understanding of the following topics:

• The management of exchange rate risk through the forward foreign exchange market.
• The balance of payments and the economic forces that cause exchange rates to fluctuate.
• The relationships between exchange rates and nominal interest rates.
• The link between exchange rates and the prices of goods across countries – in theory and in practice.
• The risks and benefits of investing in international capital markets.
• Political and country risk and their influence on international capital budgeting.

• Assessing the uncertainty about future exchange rate changes.
• Calculating parity-derived relationships between interest rates and exchange rates.
• Assessing the risk premium associated with investments in the forward market.
• Calculating baseline exchange rate forecasts based on purchasing power parity.
• Calculating required rates of return for international investments based on the world Capital Asset Pricing Model.
• Incorporating political and country risk in capital budgeting decisions.

1. International Economics and Finance
2. The Forward Foreign Exchange Market
3. The Balance of Payments
4. Interest Rate Parity
5. Exchange Rate Risk and Exposure
6. Real Exchange Rates
7. Investing in International Capital Markets
8. Political and Country Specific Risk