FIN 3524 International Financial Management
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.
More and more international financial and economic data are becoming available. Financial theory is lenses through which we study data, and helps us identify what data to use and how to analyze the data. We will strive to use digital tools, such as spreadsheets and R, to access up-to-date data and to base quantitative exercises and cases on actual, recent data.
This course will describe exchange rate fluctuations. We will use the empirical failure of the parity conjectures to get a deeper understanding of exchange-rate risk facing both businesses and individuals. We will then cover financial instruments that are available to manage the risks involved in international operations and how hedging may be value creation. For businesses, access to international markets comes with opportunities in addition to risk, and the course will examine how increased diversification internationally also may be financial value-added. Finally, globalization has lead to increased integration in the world economy. During the course, we will also cover "political risk" and emphasize that it is not only a concern in emerging economies.
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:
- Nominal exchange rates are highly volatile, and future movements in nominal exchange rates are, for most practical purposes, unpredictable
- How real exchange rates differ from nominal exchange rates and that data shows that real exchange rates are almost as volatile as nominal exchange rates
- What a "carry trade" is, why it may be profitable in expectation, and how we may infer from the fact that all investors do not engage in carry trades, that exchange rates are not only volatile but also risky
- The management of exchange-rate risk through futures, forwards, options, and swaps
- Criteria for when exchange-rate hedging may be value-added.
- Value-added from diversification in international capital markets
During the acquisition of the above-mentioned knowledge the students will acquire the following skills:
- Assessing the uncertainty and riskiness associated with future exchange rate changes
- Assessing the value of futures, forwards, options and swaps, and under what conditions hedging of foreign-exchange risk is value-added
- Compute the value-added from international diversification
Upon completion of the course, students should recognize the risks involved in conducting business involving several currencies. The theoretical and practical knowledge provided should enable students to assess these risks and to understand the financial instruments that are available to manage them and critically assess whether it is economically beneficial to use these instruments. Students should also appreciate the potential value-added of increased diversification that international markets provide.
- International financial management
- Nominal exchange rates
- Two key no-arbitrage relationships
- absence of triangular arbitrage
- covered interest rate parity
- Test of conjecture: nominal-exchange-rate changes are reflections of changes in price levels across countries. One takeaway: real exchange rates are almost as volatile as nominal exchange rates
- Test of conjecture: exchange-rate-changes (both nominal and real) are reflections of interest-rate differentials across countries. One takeaway: exchange rates are not only volatile and unpredictable, but they are also risky
- Tools to manage exchange-rate risk:
- Futures and forwards
- How and when should these tools be used
- When is hedging value added? Miller-Modigliani applied to fx hedging
- International capital budgeting
- Value added from international diversification
This course consists of 42 lecture hours. The course aims at giving the students an in-depth understanding of foreign-exchange risk, risk-management tools to manage foreign-exchange risk, and consequences of foreign-exchange risk for corporate decision processes. The learning process will, therefore, be a combination of conceptual understanding and quantitative exercises. To the extent it is practically feasible, the quantitative exercises will be based on up-to-date real-world data. Students will be expected to collect data from Bloomberg and other data sources. Quantitative analysis should, preferably, be done using R and/or spreadsheets (such as Excel, Google Sheets or OpenOffice).
There will be three home assignments published on Itslearning. Students must get at least two assignments approved by the lecturer in order to sit for the final exam.
Students that have not gotten approved the coursework requirements, must re-take the exercises during the next scheduled course.
Students that have not passed the written examination or who wish to improve their grade may re-take the examination in connection with the next scheduled examination.
Deviations in teaching and exams may occur if external conditions or unforeseen events call for this.
BØK 3423 Finance and FIN 3521 Corporate Finance, or equivalent.
|Mandatory coursework||Courseworks given||Courseworks required||Comment coursework|
|Mandatory||3||2||There will be three mandatory home assignments. Two must be approved by the lecturer, in order to sit for the final exam.|
|Comment coursework:||There will be three mandatory home assignments. Two must be approved by the lecturer, in order to sit for the final exam.|
|Exam category||Weight||Invigilation||Duration||Support materials||Grouping||Comment exam|
Form of assessment:
Internal and external examiner
Examination every semester
|Form of assessment:||Written submission|
|Support materials:|| |
|Resit:||Examination every semester|
Student's own work with learning resources
A course of 1 ECTS credit corresponds to a workload of 26-30 hours. Therefore a course of 7,5 ECTS credit corresponds to a workload of at least 200 hours.