GRA 6544 Financial Strategy in a Global Economy
GRA 6544 Financial Strategy in a Global Economy
The overall goal of the course it to provide the participants with a sound understanding of financial decision-making in the multinational firm. However, whilst the course is presented from a managerial perspective and thus applied in nature, decision-making is approached using firmly established theories in economics and finance. The aim of the course is threefold: i) to study the laws that play a crucial role in the international economy and global financial markets; ii) to understand how firms can hedge exchange rate risk related to both their operations and strategic decisions; and iii) to study issues in corporate finance such as capital budgeting and capital structure from a domestic perspective. The course will give an introduction on how to deal in a systematic way with the link between sustainability and cash flows and sustainability and discount rates.
The course can be broadly split into three parts. The first part of the course examines international financial markets and the determination of exchange rates. In the second part, we will consider the impact of exchange rates on the cash flows of firms. In particular, we will learn how to measure and manage (hedge) how different cash flows are exposed to unexpected changes in exchange rates. The third part of the course focuses on some traditional issues in corporate finance such as capital budgeting, cost of capital, and investments in physical assets, starting from a domestic perspective and extending it to deal with the effects of sustainability on cash-flows and discount rates.
During the acquisition of the above-mentioned knowledge, the students will acquire the following skills:
- Understand why FX-rates fluctuate and which risks these fluctuations impose on multinational corporations.
- Understand the dynamics of FX-rates and measure FX-rate risk and political risk.
- Identify and quantify a company's exposure to exchange rate risk and political risk.
- Implement hedging strategies and understand how they create value.
- Compute the value of domestic firms, calculating the optimal capital structure, and understanding the role of debt financing and taxes.
- Calculate the present value of a domestic project and make recommendations on its implementation.
- Apply the appropriate modifications to the capital budgeting process when moving from a domestic to an international setting.
- Calculate the value of multinational companies, their investment opportunities, and hedging strategies.
- Incorporate expropriation risk in the valuation of foreign investments.
Multinational corporations operate in a complex environment and the course provides a series of models to understand this environment and tools to cope with it. However, no model will be able to fully capture this complexity and we will devote time to critically assess them and show their limitations with empirical tests. Thus, an important learning outcome of this course is to understand the shortcomings of the models because this should itself enter the corporation's decision-making process.
- Introduction: Globalization and the Multinational Firm
- The International Monetary System: FX-rate quotation, Foreign Exchange Market, Balance of payments, FX-rate regimes
- Parity Relationships: covered and uncovered interest parity, purchasing power parity, international Fisher effect, carry trading
- Currency Futures and Options for Hedging
- Transaction (contractual) Exposure: financial hedging with derivatives, special hedging problems, alternative hedging approaches
- Operating Exposure: reclassification of financial statements, measurement of linear vs non-linear exposure, financial hedging with derivatives, operational hedging.
- Domestic Capital Structure: Modigliani-Miller theorems I and II without taxes, and with taxes.
- International Capital Structure and the Cost of Capital: the role currency risk and debt financing from the perspective of a multinational corporation.
- Net Present Value (NPV): theoretical foundations, practical adjustment in presence of political risk in international investments.
- Domestic Capital Budgeting: Weighted Average Cost of Capital (WACC), Adjusted Present Value (APV), and Flow to Equity approach (FTE).
- International Capital Budgeting: the role of royalties, cross-border dividend payments, cannibalization of exports, and financial-side effects in an international environment.
The active learning process develops throughout the semester based on the following teaching and learning activities.
- In-class lectures, where students have the opportunity to discuss with the lecturer the theory part of the course.
- Pre-recorded videos that further develop the topics covered in class, with focus on the quantitative topics and applications of the theory discussed in class.
- Digital drop-in sessions to mentor the students and support their active learning process throughout the entire semester.
- A set of periodic and non-graded homework assignments, with the help of which the students can practice by solving exercises, and further develop their skills during the semester.
- Two take-home projects thanks to which students can familiarize with the implementation in Excel of complex tasks related to the theory discussed in class, and solve a case study from the perspective of a multinational corporation.
The exam for this course has been changed starting academic year 2023/2024. The course now has two exam codes instead of one. It is not possible to retake the old version of the exam. Please note new exam codes in the Exam section of the course description.
It is the student’s own responsibility to obtain any information provided in class.
Honour Code
Academic honesty and trust are important to all of us as individuals, and represent values that are encouraged and promoted by the honour code system. This is a most significant university tradition. Students are responsible for familiarizing themselves with the ideals of the honour code system, to which the faculty are also deeply committed. Any violation of the honour code will be dealt with in accordance with BI’s procedures for cheating. These issues are a serious matter to everyone associated with the programs at BI and are at the heart of the honour code and academic integrity. If you have any questions about your responsibilities under the honour code, please ask.
All courses in the Masters programme will assume that students have fulfilled the admission requirements for the programme. In addition, courses in second, third and/or fourth semester can have specific prerequisites and will assume that students have followed normal study progression. For double degree and exchange students, please note that equivalent courses are accepted.
Disclaimer
Deviations in teaching and exams may occur if external conditions or unforeseen events call for this.
Basic knowledge of Microsoft Excel.
| Assessments |
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Exam category: Submission Form of assessment: Structured test Weight: 30 Grouping: Individual Duration: 24 Hour(s) Comment: Case work that will involve group work in groups of 4-5, but individual assessment based on an individual test. Exam code: GRA 65442 Grading scale: ECTS Resit: Examination when next scheduled course |
Exam category: Submission Form of assessment: Written submission Invigilation Weight: 70 Grouping: Individual Support materials:
Duration: 3 Hour(s) Comment: Final written examination under supervision Exam code: GRA 65443 Grading scale: ECTS Resit: Examination when next scheduled course |
All exams must be passed to get a grade in this course.
A course of 1 ECTS credit corresponds to a workload of 26-30 hours. Therefore a course of 6 ECTS credits corresponds to a workload of at least 160 hours.