CEP371 INTERNATIONAL FINANCE

 

 

COURSE COORDINATOR:          Karel Brůna, Ph.D.

                                                           University of Economics, Prague

Department of Monetary Theory and Policy

Senior lecturer

 

OFFICE: 183 new building

CLASS HOURS:       Wednesday 14,30-16,00 (room no. 322 in old building)

Thursday 12,45-14,15 (room no. 306 in old building)

OFFICE HOURS:  

E-MAIL: bruna@vse.cz

 

 

COURSE OBJECTIVE

 

The objective of the course is to provide an understanding of both the key features of foreign exchange markets and the actual problems of multinational corporation within an environment of free flows of foreign capital and floating exchange rates. Our attention will be especially focused on:

 

  • the architecture of foreign exchange markets
  • the motivation of participants in foreign exchange markets (arbitrage, speculation, hedging)
  • the role of conventions in exchange rates quotation and trading in foreign exchange markets
  • the type of foreign exchange operations (spot, forward, FX swaps, currency swaps, futures and option)
  • the factors that influence the price of currency derivatives (forward rate, swap points, interest rates, futures price, option premium)
  • the relationship between the changes of exchange rates and the dynamics of  fundamental economic factors (balance of payments, inflation, interest rates, expectations)
  • the prediction of future exchange rates movements by the tools of technical analysis
  • the changes of foreign currency regime since the crash of Bretton Woods regime of fixed exchange rates
  • the nature of foreign exchange exposure and risk and its management
  • the structure of the balance of payments and main relations between economic transaction in the balance of payments

 

 

KNOWLEDGE AND SKILLS AFTER COMPLETING THE COURSE

 

By the end of this course, students should be able to understand the mechanism of foreign exchange markets as well as how exchange rates are quoted. Students should understand the techniques of the main foreign exchange transactions. They should also know the factors that drive exchange rates, in particular how spot and forward rates are related to interest rates and inflation dynamics. They should also learn how to use these relations in foreign exchange rates forecasting. The course provides students with knowledge of and competence in identifying the nature of foreign exchange risk and main types of foreign exchange exposure that company face, as well as in using main techniques of hedging foreign exchange risk. They should also be aware of the most important changes in international financial environment since the end of Bretton Woods.

 

 

COURSE MATERIAL

 

Eiteman, D. K., Stonehill, A. I., Moffeit, M. H.: Multinational Business Finance, 8th Edition, Addison Wesley, 1999

Shapiro A. C.: Multinational Financial Management, 6th Edition, Prentice Hall, 1999

Materials from http://www.financetrainer.com/english/Publications/ToolsScripts/tabid/517/Default.aspx

 

 

 

COURSE FORMAT

 

The course combines lectures, exercises and discussions on actual problems.

 

 

COURSE ASSESSMENT

 

Students will be graded on the basis of: solving the series of mini cases during the term (20 %), presentation of the project (50 %), written exam on literature and class handouts (30 %)

 

 

PROJECT

 

The presentation of the project is the crucial part of the course grade. The participants of the course are expected to form the teams that consist of three, four or five students and that will work on the project. The project is oriented on discussion of special subjects related to international finance such as: evaluation techniques for currency derivatives, special type of currency derivatives, hedging strategy in foreign exchange market, fundamental or technical analysis of exchange rate movements, exchange rate prediction, risk in market maker’s foreign exchange transactions, managing exchange rate risk in global oriented firm, analysis of balance of payments of selected country etc. Students are expected to actively seek for and find the subject of the project depending on their knowledge and preferences.

The project should take the form of extended essay (10-20 pages), should be problem oriented and should be based not only on the textbooks but also on new sources of information that can be found in the last published research papers, books or on www pages.

 

The final presentation should in short review main topic of the project and discuss in detail the project’s results and conclusions. It’s expected that the presentation will take about 10-15 minutes and all members of the team will be prepared to react on the questions of the auditorium after the presentation.

 

EXAM

 

The final written exam consists of 10 multiply choice questions + 3 short exercises. All the questions and exercises are based on class lectures, class handouts and literature.

COURSE SCHEDULE AND CONTENT

 

1.-2. Foreign Exchange Markets

 

Geographical extent

            Trading systems

            Market participants

            Type of FX transactions

            FX rates quotation

            Motivation (Arbitrage, Speculation, Hedging)

Cross rates

 

Eiteman, D. K., Stonehill, A. I., Moffeit, M. H.: Multinational Business Finance, 8th Edition, Addison Wesley, 1999, chapter 4

http://www.financetrainer.com/Portals/2/Formel-Service/tcs0101_e.pdf

 

3.-4. Outright Forwards and FX Swaps

 

Main features of forward contract

Forward rates and swap points calculation and quotation

Interest rate parity and covered interest rate arbitrage

Forward contract and hedging

Main features of FX swaps

Main type of FX swaps

 

Shapiro A. C.: Multinational Financial Management, 6th Edition, Prentice Hall, 1999, chapter 5.3-4

http://www.financetrainer.com/Portals/2/Formel-Service/tcs0102_e.pdf

 

5. Currency Swaps

 

            Main features of currency swaps

            Fixed-to-fixed swaps, fixed-to-float swaps and float-to-float swaps

            Currency swaps price quotation and calculation

            Example on hedging and financing using currency swaps

                       

Eiteman, D. K., Stonehill, A. I., Moffeit, M. H.: Multinational Business Finance, 8th Edition, Addison Wesley, 1999, chapter

http://www.financetrainer.com/Portals/2/Formel-Service/tcs0304_e.pdf

 

6. Foreign Currency Futures

 

Main features of currency futures contract

Forward contract vs. currency futures contract

Futures price quotation and calculation

Daily settlement with currency futures contract

Currency futures contract and hedging

 

Shapiro A. C.: Multinational Financial Management, 6th Edition, Prentice Hall, 1999, chapter 6.1

 

7. Foreign Currency Options

 

            Main features of currency option contract

            Currency option exercise price and premium

            Currency option quotation

            Profit and loss positions

            Currency options and hedging

 

Eiteman, D. K., Stonehill, A. I., Moffeit, M. H.: Multinational Business Finance, 8th Edition, Addison Wesley, 1999, chapter 6

http://www.financetrainer.com/Portals/2/Formel-Service/tcs0103_e.pdf

 

8. Theory of Exchange Rate Determination and International Parity Conditions

 

            Prices, interest rates and FX rates

            Purchasing power parity

            International Fisher effect

            Interest rate parity

            Forward rate and future spot rate

 

Eiteman, D. K., Stonehill, A. I., Moffeit, M. H.: Multinational Business Finance, 8th Edition, Addison Wesley, 1999, chapter 5

 

9. International Monetary System and Foreign Exchange Rate Policy

 

Fixed vs. flexible exchange rate regimes

            History of international monetary system

            Project of European Monetary Union   

 

Shapiro A. C.: Multinational Financial Management, 6th Edition, Prentice Hall, 1999, chapter 3

 

10. Balance of Payments

 

            Balance of payments statement

            Foreign transaction in balance of payments

            Balance of payments structure

            Current account balance, financial account balance and changes in official reserves

 

Eiteman, D. K., Stonehill, A. I., Moffeit, M. H.: Multinational Business Finance, 8th Edition, Addison Wesley, 1999, chapter 3

 

11. Managing Foreign Exchange Exposure and Risk

 

Types of foreign exchange exposure

Transaction exposure

Operating (economic) exposure

Managing foreign exchange exposure and risk

 

Eiteman, D. K., Stonehill, A. I., Moffeit, M. H.: Multinational Business Finance, 8th Edition, Addison Wesley, 1999, chapter 7 and 8

 

12. Presentations of Project

 

13. Exam