Oslo University College

A

International Finance

Spring 2009

Instructor: Associate Professor Ivar Bredesen

Credits:10 ECTS (80 % exam, 20 % assignments)

The aim of this course is to analyse international financial markets. In particular, the course will analyse exchange rate determination and exchange rate behaviour. Building upon this, the course will discuss instruments available to firms for dealing with exchange rate risk. It will be assumed that students havepassed introductory courses in economics and finance prior to starting this course.

Subject

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Date

Part 1: The International Financial Environment

Introduction

  • The subject matter of international finance
  • Why international finance is different
  • Risk in international business
Readings: MF, chapter 1 and 2. These are introductory chapters and there is no need to master the details. / 15.01.09

International Financial Markets

  • The international monetary system
  • The foreign exchange market
  • Market participants and market functions
  • Exchange rate quotations
Readings: MF, chapter 3. / 15.01.09

Introduction to exchange rate determination

  • Equilibrium in currency markets
  • Factors which affect exchange rates
  • Exchange rate speculation
  • Question 19, 20,21.
Required assignment 1: Case Blades p.104 and Case Blades p. 141 to be handed in by29.01.09
Readings: MF, chapter 4. / 22.01.09

Currency derivatives

  • The forward market
  • The futures market
  • Currency swaps
  • Currency options
  • The Garman – Kohlhagen model
  • Options strangles, straddles and spreads
  • Question 18, 19, 20, 25, 26, 29, 31, 34. Other questions will be handed out also. There will also be more assignments relating to options later in the course.
Readings: MF, chapter 5 including appendix 5a and B. Other exercises will be handed out. / 29.01.09
05.02.09
12.02.09

Part 2: Exchange Rate Behaviour

International Arbitrage and Interest Rate Parity

  • International arbitrage
  • Covered and uncovered interest arbitrage, interest rate parity
  • Spot- and forward rates
  • Question 2, 4, 6, 29
Required assignment 2: Case Blades p. 183, case Blades p. 278 and case Option Pricing to be handed in by 19.03.09
Readings: MF, chapter 7. / 19.02.09
12.03.09

Inflation, interest rates and exchange rates

  • Purchasing power parity (PPP)
  • Empirical testing of PPP
  • International Fisher effect
  • Question 20, 24, 26, 34.
  • Integrative question page 317
Readings: MF, chapter 8. / 19.03.09

Part 3: Exchange Rate Risk Management

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Forecasting exchange rates

  • Why do we need forecasts?
  • Forecasting techniques
  • Forecasting accuracy
  • Exchange rate volatility
  • Question 2, 3, 19
Readings: MF, chapter 9. / 26.03.09

Measuring Exposure to Exchange Rate Fluctuations

  • Is exchange risk relevant?
  • Transaction, translation and economic exposure
  • Introduction to exchange rate risk hedging
  • Value at risk (VaR)
Reading: MF, chapter 10. / 26.03.09

Managing Transaction Exposure

  • Futures hedge
  • Forward hedge
  • Money market hedge
  • Option hedge
  • Long term hedging
  • Exercises will be handed out
Reading: MF, chapter 11including app 11B. / 02.04.09
16.04.09

Managing Economic Exposure and Translation Exposure

  • Assessing economic and translation exposure
  • Managing economic and translation exposure
  • Money market hedge
Required assignment 3: Case Blade p. 423 and case Toyotas European Operating Exposure to be handed in 20.04.09
Reading: MF, chapter 12. / 17.04.09
Summing up and exam preparation / 23.04.08
Required reading: Jeff Madura and Roland Fox: International Financial Management, 1st edition, 2007, chapters as outlined above. This book is also available under the title International Corporate Finance, 8th edition or International Financial Management, 8th edition. The suggested dates of each topic are tentative and subject to change. /