The University of Lethbridge
Faculty of Management
Management 3460
Global Finance
Fall 2010
TH 173
A.P. Palasvirta, Ph.D.
Office M4132
Phone: (403) 332-4582
e-mail: oz.palasvirta@uleth.ca
Goal of Course
The mechanics of international markets are becoming increasingly relevant to the study of
business. Money and capital markets are already nearly completely internationalized. Daily capital flows
are quite large and have very dramatic effects on international valuation of assets. Goods markets are
quickly becoming internationalized. Free trade areas are accelerating the conversion of the world into
one goods market. It is imperative that students be familiar with the manner in which the international
financial system and trading markets operate. Consequently, we will examine the problems and policies
of financial decision making in the multinational corporation (MNC), from the perspective of nonfinancial managers.
The underlying presumption is that financial management concepts, which are useful in a singlecountry context, must be adapted, sometimes quite dramatically, in an international context. This
requires that firms employ multiple sets of goals to take into consideration country-specific factors in
the decision process, e.g., political risk as a function of host-government policies, cultural criteria
affecting the work habits and productivity of host-country labor, perceptions about how shareholders
and management regard risk in the host country. We will discuss these factors in the context of how
they modify the risks of the firm in the capital budgeting process.
We will also address other complicating factors such as problems that arise for denominating all
operating cash flows in terms of another unit of account, thus exposing the international firm to
exchange rate risk. Much of our energy during the semester will be concentrated in understanding the
impact of parity conditions upon international money and capital, and goods flows. We will also examine
the means, e.g, forward, futures, options and swaps contracts, which are used to hedge exchange rate
risk by MNCs.
Whenever possible and convenient, current events, relevant to the course, will be integrated into
the class discussion.
Text and Other Sources
International Financial Management, Canadian Perspectives 2nd Ed., Eun, Resnick, and Brean, Toronto:
McGraw-Hill Ryerson, ISBN 13: 978-0-07-096490-7.
The Globe & Mail, Calgary Herald, National Post
Administration of the Course
Each class period is given below along with the material that will be covered during that period. Each
period will begin with a discussion of the events currently happening in the world that have relevance to
the material that we are covering in the book. I also will post on-line my lecture notes in the form of
powerpoint presentations. It is strongly recommended that the best way to navigate through the
material is to read ahead. Most chapters will be covered in two class periods giving you ample time to
read the chapter and think about the questions given at the end of the chapter to deepen your
knowledge of the material.
Examination will be through two midterm exams on the material noted and a final exam that will be
comprehensive including all the materials covered over the complete semester. The grading in the
course will be proportioned as follows:
Each term exam: 30%
Final exam: 40%
Midterm Examinations will include three types of questions: ten definitions worth three points each and
multiple short-answer and problem questions totaling 70 pts. You will have the full period, 90 minutes
to complete the midterm exams.
The final will be 150 points to include 15 definitions worth three points each and multiple short-answer
and problem questions totaling 105 points. You will have a full 120 minutes to complete the final exam.
The exams will be graded and assigned a point total with the following approximate letter grade
equivalents.
A+
A
AB+
B
BC+
C
CD+
D
F
90 – 100 pts
85 – 89 pts
80 – 84 pts
77 – 79 pts
73 – 76 pts
7 0 – 72 pts
67 – 69 pts
63 – 66 pts
60 – 62 pts
55 – 59 pts
50 – 54 pts
below 50 pts
Course Outline
Week One
Learning Objectives: We will discuss the major concepts necessary to understand
international trends in economics: types of monetary regimes, exchange rates, balance of
payments, exposure, international financing of trade and investment.
1.
September 9
Discussion of course objectives, grading, etc
Chapter 1
Week Two
Learning Objectives: The international monetary system provides liquidity for not only
international trade but also international financial flows for both portfolio and foreign direct
investment. We will examine the evolution of the international monetary system to what
exists today. Today we have four types of international monetary arrangements: the fixed
exchange rate regime, the floating exchange rate regime, and dollarization. How these differ
and how they affect their underlying economies is important.
2.
3.
September 14
September 16
Evolution of the system
Comparison of the current systems
Chapter 2
Chapter 2
Week Three
Learning Objectives: A Canada’s balance of payments (BOP) identifies, in Canadian dollar
terms, how much of that country’s goods, services, and wealth have been purchased by
individuals outside of Canada and how much individuals in Canada have purchased of foreign
goods, services, and wealth. Goods, services and wealth are tallied in different accounts. The
difference is known as the BOP. We will also examine the impact that either a BOP deficit or
surplus has on international and internal prices .
4.
5.
September 21
September 23
Balance of payments accounts
The function and structure of the markets
Chapter 3
Chapter 4
Week Four
Learning Objectives: Foreign exchange markets average nearly $4 trillion dollars of trades
daily which makes it the biggest and most dynamic market in the world. We will learn the
vocabulary of foreign exchange trading as well as the mechanics of it.
6.
7.
September 28
September 30
Week Five
Spot and forward markets
The parity conditions
Chapter 4
Chapter 5
Learning Objectives: Parity conditions are theoretical statements that state that pair-wise
between economies of relationships between prices, interest rates, and exchange rates. These
theoretical statements assume efficient markets and ceteris paribus conditions. We will
examine their usefulness in forecasting.
8.
9.
October 5
October 7
Forecasting
a quick review
Chapter 5
Chapters 1 -5
Week Six
10.
October 12
Thanksgiving (no classes)
October 14
Midterm exam
Chapters 1 to 5
Week Seven
Learning Objectives: The international banking system contributed to a world-wide liquidity
meltdown in 2009. We will discuss this in the context of the multiplicity of regulatory
frameworks with respect to reserve ratios and capital adequacy standards. Obviously there is
going to be re-regulation of financial system that we will also examine from the point of view
of Canada and its trading partners.
11.
12.
October 19
October 21
The function and structure of international banking
Debt crises, their origins and their impacts
Chapter 6
Chapter 6
Week Eight
Learning Objectives: Chartered (deposit) banks, historically, have provided much of the
sources for financing of both trade and portfolio and foreign direct investment. Investment
banks and secondary markets in bonds, bills, and asset-backed securities increasingly are
competing for business. Financial services firms recently have blurred the distinction between
deposit banking and investment banking. Obviously there have been consequences to this
evolution to full financial services of financial firms.
13.
14.
October 26
October 28
The bond markets
The equity markets
Chapter 7
Chapter 8
Week Nine
Learning Objectives: The media has characterized derivative contracts as being very risky.
However there are two sides to the argument and the one has not had much exposure in the
press. Derivative contracts were initially and still used to hedge risk; to offload the risk of
volatility of prices onto some one else. Often both sides of the contract are hedging risk, but
speculators do exist who take additional risk for a potential higher expected return; they are
making a bet on the market direction.
15.
16.
November 2
November 4
Futures & options
Interest rate swaps & currency
Chapter 9
Chapter 10
Week Ten
Learning Objectives: You have already looked at the role of pair-wise correlation of
individual return distributions in reducing overall portfolio risk, the variance of the portfolio.
This diversification benefit was very strong even when putting domestic assets into a balanced
portfolio where all the assets were generating their returns in the same economy. However,
now it is possible to diversify into assets generating returns in other economies that have very
different dynamics. We will look at the benefits of international portfolio diversification.
17.
18.
November 9
November 11
International portfolio diversification
International portfolio diversification
Chapter 11
Chapter 11
Week Eleven
Learning Objectives:
Foreign direct investment involves investment in real assets in other
countries, not just financial assets. This involves very different levels of risk to the firm:
political risk, operating and accounting exposure, etc. We will discuss these risks.
19.
20.
November 16
November 18
Foreign direct investment
a quick review
Chapter 15
Chapters 6 -11,15
Week Twelve
Learning Objectives: Economic exposure exists because real exchange rates change.
Previously we talked about the parity conditions and noted that if purchasing power parity
does not hold, then there are real consequences with respect to the value of trade between
two countries. We will examine the consequences of economic exposure
21.
November 23
Midterm Two
22.
November 25
Economic exposure
Chapters 6 -11,15
Chapter 12
Week Thirteen
Learning Objectives: Transaction exposure is faced anytime you have a time lag between
fixing a price in a contract and the payment of the contract. With floating exchange rates, your
return fixed in another currency, can change in your domestic currency. We will discuss
methods that one can use to hedge this exposure.
23.
24.
November 30
December 2
Transaction exposure
Transaction exposure
Chapter 13
Chapter 13
Week Fourteen
Learning Objectives: Translation exposure refers to the risk to the firm’s financial
statements as a result of exchange rate changes.
25.
26.
December 7
December 9
Translation exposure
Review
Chapter 14
Week Fifteen
27.
December 14:
Final exam (Tuesday, 14:00 – 16:00)
(date subject to change)
Chapters 1 – 15