IFM - Course PLAN PDF

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IFM course plan 2019...

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BI Norwegian Business School, Dept. of Financial Economics FIN 3524 Int’l Financial Management | Winter/Spring 2019 **** ROUGH DRAFT ****

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Course Objective

The course covers major topics in global finance: the working of international capital markets (investor) and international corporate finance (sourcing and managing funds in an international context). In the first part of the course, we will document the risk and volatility of nominal and real exchange rates. We observe nominal exchange rates. They are volatile and unpredictable. As decision makers, we care about real exchange rates. We’ll document that they are almost as volatile and unpredictable as nominal exchange rates. In this part we’ll also cover gains from international trade and some institutional features of international currency markets. In the second part of the course, we’ll cover the main tools we have available to hedge the exchange-rate risk, documented in the first part. We will cover: forwards/futures, options, and swaps. In this part we will also cover some institutional features of international currency derivatives markets. When starting the third part, we have established that (real) exchange rates are highly volatile and unpredictable and that we have tools to remove this foreign-exchange-rate risk. The remaining question that we will try to answer in the third part is whether and when we should use these tools. This part includes various topcis in international corporate finance, in particular the definition, measurement and hedging of global risks. We will also cover gains from international portfolio diversification.

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Lectures

Mondays 08:00–10:45 @ C1-050

3 3.1

Administrative Instructor

Name: Espen Henriksen Office: B4-065 Course Webpage: It’s learning Email: [email protected] (Please allow 24 hours to receive a reply to an email)

Office Hours: Wednesdays 12:00–14:00 Or by appointment.

3.2

Teaching Assistant

Jonas Barth-Stenersen Email: [email protected]

3.3 3.3.1

Textbook Required textbook

Cheol Eun and Bruce Resnick (2018) International Financial Mgmt. 8th Ed. McGrawHill. You may also use previous editions of this textbook, such as Cheol Eun and Bruce Resnick (2014) International Finance 7th Global Edition. McGrawHill. Additional material may be added to the syllabus or uploaded to the webpage 3.3.2

Recommended supplementary reading

Piet Sercu (2009). International Finance Theory into Practice. Princeton University Press. The Economist and Bloomberg Markets. They are not required, but I would recommend you to get subscriptions and, in addition, check the websites www.economist.com and www.bloomberg.com/markets/markets-magazine regularily. It gives you a (weekly) summary of what’s going on in the world.

3.4

Prerequisites

I expect you to be able to apply the basic tools of economics, mathematics, statistics, spreadsheets, R, and to have finished Bloomberg Market Concepts (BMC).1 We will use Bloomberg terminals, R and spreadsheets (extensively) and calculus (somewhat).

3.5

No-laptop policy

The class has a no-laptop policy. Studies provide consistent evidence that you learn more, both individually and as a class, when laptops are closed and you write notes by hand. Students who take notes by hand remember more and have a deeper understanding of the material. In addition, taking notes by laptop is a large negative externality on other students in class.2 1 A list of free courses, books, tutorials and cheat sheets for R: https://paulvanderlaken.com/2017/ 08/10/r-resources-cheatsheets-tutorials-books/ 2 https://www.scientificamerican.com/article/a-learning-secret-don-t-take-notes-withSee e.g. a-laptop/ and https://www.brookings.edu/research/for-better-learning-in-college-lectures-lay-downthe-laptop-and-pick-up-a-pen/.

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Exams and homeworks

4.1

Final exam

There will be one final exam for this class that will count 100% toward the final grade. As of primio January, the exam is set for June 3rd . You are responsible to checking and confirming the exam date with the student administration.

4.2

Homework assignments

There will be three homework assignments. You will have to receive a passing grade on two of these three assignments to write the final exam. 1. The first homework will be posted on Friday January 25th 2. The second homework will be posted on Friday February 22nd 3. The third homework will be posted on Friday March 22nd

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Agenda

5.1

Exchange rates are volatile and risky

1. Monday January 7th Plan • • • • •

Administrative Introduction to international finance Introduction to foreign exchange markets Spot exchange rates Crash course in “carry trades”

Preparations • Read either/or – Eun and Resnick (2018, Ch. 1 and “The Spot Market” from Ch. 5) – Eun and Resnick (2014, Ch. 1 and “The Spot Market” from Ch. 5) • Read the handout selected coverage of the Gassled court-case from the Wall Street Journal • Complete the BMC course3 Supplementary • Sercu (2009, Chapter 3) • Burnside et al. (2011) • Bloomberg Terminal, check out: – FXC allows you to monitor cross currency spot, forward, and fixing rates to compare real-time historical rates. 3

BMC is available free of charge on the Bloomberg Terminals. More information on the BI Library webpage

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– FXIP provides a comprehensive overview of foreign exchange information. Allows you to access pricing data, news and analytics – FXTI foreign exchange trade ideas – FXSW allows you to analyze foreign exchange carry trades 2. Monday January 14th Plan • Brief intro to carry trades: fx rates are risky • Covered interest rate parity / Forward rates • Brief intro to R Preparations • Read either/or – Eun and Resnick (2018, ”Covered interest arbitrage” in Ch. 6) – Eun and Resnick (2014, ”Covered interest arbitrage” in Ch. 6) • Check out: FXSW – the Bloomberg FX Strategy Workbench and test different carry pairs Please see the appendix for further instructions Supplementary • A (very) short introduction to R https://www-binf.bio.uu.nl/rdb/te/Introduction_to_R.pdf

• R resources (free courses, books, tutorials, & cheat sheets) https://paulvanderlaken.com/2017/08/10/r-resources-cheatsheets-tutorials-books/

3. Monday January 21st Plan • The international monetary system • Briefly on crypto currencies Preparations • Read: – Eun and Resnick (2018, Chapter 2 ) – Eun and Resnick (2014, Chapter 2 ) • Check out: VCCY – the Bloomberg Crypto Currency Monitor Please see the appendix for further instructions Supplementary • Chapter 5 “Cryptocurrencies: looking beyond the hype” of the BIS Annual Economic Report 2018 https://www.bis.org/publ/arpdf/ar2018e5.pdf

• David Andolfatto (2018): “Blockchain: What It Is, What It Does, and Why You Probably Don’t Need One” https://research.stlouisfed.org/publications/review/2018/02/13/blockchainwhat-it-is-what-it-does-and-why-you-probably-dont-need-one/

• Watch and enjoy https://www.youtube.com/watch?v=g-zIbVEjVpQ • Listen and enjoy https://www.npr.org/sections/money/2018/01/05/576087864/episode-816bitcoin-losers

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• Hamrick et al. (2018) 4. Monday January 28th Plan • • • •

Balance of payments Current accounts Country risks Do nominal exchange rate movements reflect relative changes in cost and income levels? (”PPP”)

Preparations • Read: – Eun and Resnick (2018, Chapters 3 and 6) – Eun and Resnick (2014, Chapters 3 and 6) • Read about the Gassled case (exhibits uploaded to It’s Learning) Supplementary • Sercu (2009, Chapter 4.3) • Backus et al. (2009) 5. Monday February 4th Plan • Do nominal exchange rate movements reflect relative differences in interest rates? (”UIP”) • Carry trades Preparations • Read: – Eun and Resnick (2018, Chapter 6) – Eun and Resnick (2014, Chapter 6) Supplementary • Sercu (2009, Chapter 4.3)

5.2

Tools to manage exchange-rate risk

6. Monday February 11th Plan • Futures / forwards Preparations • Read: – Eun and Resnick (2018, Chapter 7 ) – Eun and Resnick (2014, Chapter 7 ) Supplementary • Sercu (2009, Chapters 7 and 8)

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7. Monday February 18th Plan • Options Preparations • Read: – Eun and Resnick (2018, Chapter 7) – Eun and Resnick (2014, Chapter 7) Supplementary • Sercu (2009, Chapters 7 and 8) 8. Monday February 25th Plan • Swaps from a banker’s perspective Preparations • Read: – Eun and Resnick (2018, Chapter 14) – Eun and Resnick (2014, Chapter 14) Supplementary • Sercu (2009, Chapters 12 and 13) 9. Monday March 4th Plan • Swaps from a CFO’s perspective Preparations • Read: – Eun and Resnick (2018, Chapter 14) – Eun and Resnick (2014, Chapter 14)

5.3

To hedge or not to hedge fx risk? Managing fx exposure

10. Monday March 11th Plan • How to measure foreign exchange exposure • When (if ever) should a firm hedge foreign exchange exposure • Three types of exposure Preparations • Read: – Eun and Resnick (2018, Chapter 8) – Eun and Resnick (2014, Chapter 8) Supplementary • Sercu (2009, Chapters 12 and 13) 6

11. Monday March 18th Plan • Management of economic exposure • Management of translation exposure Preparations • Read: – Eun and Resnick (2018, Chapter 9 and 10) – Eun and Resnick (2014, Chapter 9 and 10) Supplementary • Sercu (2009, Chapters 12 and 13) 12. Monday March 25th Plan • The Eurocurrency Market • The international cost of capital • Corporate Sources and Uses of Funds Preparations • Read: – Eun and Resnick (2018, Chapters 11 and 17) – Eun and Resnick (2014, Chapters 11 and 17) 13. Monday April 1st Plan • International capital budgeting Preparations • Read: – Eun and Resnick (2018, Chapters 18) – Eun and Resnick (2014, Chapters 18) 14. Monday April 8th Plan • International portfolio investment • Case: the establishment of the Norwegian sovereign wealth fund Preparations • Read: – Eun and Resnick (2018, Chapters 13 and 16) – Eun and Resnick (2014, Chapters 13 and 16) Supplementary • Financial Times Monday March 12: “Market crash concerns hang over Norway’s $1Tn fund” • Henriksen and Mork (2016) 15. Monday April 15th Plan

Open / Review

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References Backus, D., E. Henriksen, F. Lambert, and C. Telmer (2009). Current account: Fact and fiction. Working Paper 15525, NBER. Burnside, C., M. Eichenbaum, and S. Rebelo (2011). Carry trade and momentum in currency markets. Annual Review of Financial Economics 3 (1), 511–535. Eun, C. S. and B. G. Resnick (2014). International Finance (7 ed.). McGraw-Hill. Eun, C. S. and B. G. Resnick (2018). International Financial Management (8 ed.). McGraw-Hill. Hamrick, J., F. Rouhi, A. Mukherjee, A. Feder, N. Gandal, T. Moore, and M. Vasek (2018). The economics of cryptocurrency pump and dump schemes. Discussion Paper 13404, CEPR. https://cepr.org/active/publications/discussion_papers/dp. php?dpno=13404# and https://ssrn.com/abstract=3303365. Henriksen, E. and K. A. Mork (2016). The bond-equity allocation of the Norwegian sovereign wealth fund. http://voxeu.org/article/bond-equity-allocationnorwegian-sovereign-wealth-fund. Sercu, P. (2009). International Finance: Theory into Practice. Princeton University Press.

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A

Appendix -------------   December 29, 2017: VCCY   ------------One of the hottest topics in the world right now revolves around digital currency, with bitcoin sitting at the center of every conversation.While bitcoin bolstered its credibility with the start of futures contracts on a second U.S. exchange, its cryptocurrency rivals have outperformed in 2017. Bloomberg's charting tools can be usedto compare the performance of bitcoin, up almost 2,000 percent this year, to an index of the top 10 digital currencies that surged more than 6,000 percent as newer decentralized ledger technologies won endorsements. You can also use Bloomberg to set up monitors to track Twitter statements that are often the rocket fuel accelerating advances.

Bloomberg’s cryptocurrency monitor - VCCY -now has live prices for other digital currencies, including Ripple’s XRP, ethereum and litecoin. The prices come from Bitstamp, an online digital exchange. Type "crypto" in the command bar and select VCCY - Crypto Currency Monitor. Notice that bitcoin outperformed the other currencies on the Monday after futures started trading on the Chicago Mercantile Exchange. Those contracts, and those that started trading a week earlier on Cboe Global Markets Inc., can be found on the top right.  Best, The Bloomberg for Education Team

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