FI 4040: Foundations in International Finance Spring 2008 Reza S. Mahani

Transcription

1 FI 4040: Foundations in International Finance Spring 2008 Reza S. Mahani FI , Tue 1:00 3:30, Aderhold Learning Center Contact Information Office: 1237 RCB Office hours: by appointment mahani@gsu.edu (best way to reach me) Frequently check WebCT (gsu.view.usg.edu) for announcements and information. 2 Textbook Required: Alan C. Shapiro, Foundations of Multinational Financial Management, 5 th ed., (ISBN: ) 3 Prerequisites Successful completion of FI (This requirement will be enforced by the department: If you do not meet it, you should expect to be automatically withdrawn.) I will emphasize the quantitative aspects of international finance. You must be comfortable with methods of quantitative analysis and graphical analysis. 4 Grading Attendance: 5% Missing a class will cost you 2% of your final grade. You have to be present the whole duration of a class to be considered present (arriving late or leaving early may count as absence). If you have to miss a class for an important reason (e.g. a work-related conflict), you need to inform me before the class to avoid the 2% penalty. If you miss a class for an unexpected reason (e.g. a medical emergency) you will have one week to discuss it with me. After the one week, no adjustment will be allowed. Once you have three unexcused absences, you will be withdrawn from the course with a WF grade! Quizzes: 25% There are at least five quizzes and they may be unannounced. Quizzes are all multiplechoice questions, close-book, and without a formula sheet. If you appropriately inform 1

2 me about missing a quiz (see the attendance policies), the grade for that quiz will be distributed among other components of your grades. Otherwise, you receive an F grade for the quiz. There will be no make-up quiz. Midterm: 35% [Tue, Febuary 26, in class] The midterm exam is comprehensive, close-book, and without a formula sheet. It consists of short problems and multiple-choice questions. If you appropriately inform me about missing the midterm (see the attendance policies), the grade for the midterm will be distributed among other components of your grades. Otherwise, you receive an F grade for the midterm. There will be no make-up exam for midterm. Final: 35% [Tue, April 29, 12:30 pm] The final exam is comprehensive, close-book, and without a formula sheet. It consists of short problems and multiple-choice questions. The primary method of instruction will be lectures and class discussions. Participation in class discussions is very important. I will call upon you randomly to answer questions or solve problems on the board. 5 Course General Outline Deviations from this outline may become necessary. Appendix, Chapter, Section are all with reference to the textbook (Shapiro). We study fundamentals and applications of international business. We cover four areas with varying degrees of emphasis: economics, finance, accounting, and institutions: Economics Finance Accounting Institutions Fundamentals Part 1.1 Part 1.2 Part 1.3 Part 1.4 (Part 1) Applications Part 2.3 Part 2.2 Part 2.1 (Part 2) Part 1: Fundamentals Part 1.1: Economics of International Business International trade (Appendix 1.A): Define and recognize comparative advantage ; Describe gain from trade ; Describe specialization ; Define and utilize prices and exchange Rates ; 2

3 Demand and Supply (Chapter 2, Sections 1, 2): Explain currency demand and supply, and equilibrium exchange rate ; Recognize and distinguish factors that affect demand and factors that affect supply ; Describe role of expectations in equilibrium exchange rate ; Define, compute, and analyze exchange rate appreciation and depreciation ; Exchange Rate Systems (Chapter 3, Section 1): Define free float and managed float ; Quiz 1 Focuses on your understanding of the concept of exchange rate as the relative price of a currency (second item above). Part 1.2: Parity Conditions Timing (approximate): 9 hours (three weeks) We cover Chapter 4 in complete details. Describe law of one price and apply it to link currency prices in international markets; Describe, and distinguish between, real and nominal exchange rate ; Describe purchasing power parity and apply it to forecast exchange rates and understand its empirical relevance ; Describe, and distinguish between, real and nominal interest rate ; Describe fisher effect and international fisher effect and apply it to forecast exchange rates and understand its empirical relevance ; Describe forward rate and explain covered interest arbitrage and apply it to derive interest rate parity and understand its empirical relevance; Understand the relation between forward rate and future spot rate ; Quiz 2 It is absolutely essential that you understand these parities in order to proceed to the second part of the course (applications). Therefore, the focus is on solving problems which involve these parities. Part 1.3: Balance of Payments and International Flows Timing (approximate): 3 hours (one week) We cover Chapter 5, with emphasis on Section 2. Explain current account, capital account, and official reserves account ; Define balance of payment and compute it from data on international transactions; Understand the international flows and its link to domestic economic behavior; 3

4 Midterm: Tue 2/26/2008 (in class) Comprehensive (covers all materials discussed to this point); Focus is testing your understanding of important fundamentals that will be applied in the second part of the course. Part 1.4: Exchange Rate Systems and Central Banks Central Bank (Chapter 2 Section 3): Describe different forms of central bank intervention in foreign exchange market; International Monetary Systems (Chapter 3 Section 2): Describe different monetary systems ; Explain equilibrium under gold standard ; Foreign Exchange Markets (Partial coverage of Chapters 7 and 8 with focus on institutional aspects): Describe the organization of foreign exchange market and distinguish spot and forward exchange rates ; Describe currency futures and options ; Quiz 3 Part 2: Applications Part 2.1: Currency Derivatives (Forwards, Futures, and Options) Spot and Forward Exchange Rates (Chapter 7): Describe, and distinguish, different methods of foreign exchange quotation and convert one to another; Describe, and identify, profitable currency arbitrage opportunities; Describe role of forward contracts in reducing currency risk; Calculate forward premium and discount; Futures and Options (Chapter 8): Explain the similarities and differences between currency forward and futures contracts; Describe how currency futures and options can be used in reducing currency risk and to speculate on currency movements; Explain the main factors that determine price of currency options Quiz 4 You should be able to use graphical and numerical methods to solve problems involving currency risk hedging with derivatives. Part 2.2: Transaction-Risk Management We cover Chapter 10, Sections 1, 4, 5, 7; all discussions related to transaction exposure, but not translation exposure (except for its definition). 4

5 Define, and distinguish, translation and transaction exposure ; Describe hedging strategies used to manage transaction risk; Describe and implement forward market hedge, money market hedge, and currency options hedge; Identify costs associated with different hedging strategies, and relate them to different hedging objectives; Quiz 5 Part 2.3: Economic Risk Management Timing (approximate): 9 hours (three weeks) We cover Chapter 11 as far as time permits. Define economic exposure and operating exposure and identify their relation to exchange risk and transaction exposure ; Identify the factors that determine economic exposure and operating exposure and characterize them under different scenarios; Describe the methods of coping with economic and operating exposure; FINAL: Tuesday, April 29, 2008, 12:30 p.m. Comprehensive with more emphasis on the second part (after midterm). 5