International Finance
Spring
Instructor: Yiping Xu
Email: xuyiping666@aliyun.com
Office: Keyan 721
Course Description
Over the last three decades, financial markets around the world have been
transformed. Some changes have been gradual. For example, bank loans, straight debt,
and common equity shares were once the dominant financial products. Now these
products are being supplanted by commercial paper, financial futures, options and
swaps. Other changes were more abrupt, such as the collapse of the Bretton Woods
Agreement. In general these changes are in four aspects: the wider array of financial
products, the increase in price volatility, the greater intensity of competition across
financial markets and the increased incidence of financial crises. This transformation
of financial markets raises many issues for private market participants and public
policymakers.
Course Outcomes
The purpose of this course is to describe the institutional setting and economics of
pricing in the modern international financial markets, and then to outline the policy
issues affecting private individuals, firms and the government. We will divide the
international financial markets into three major groups and study them respectively:
(1) foreign exchange, (2) offshore markets and (3) derivative securities.
Grading: Your grade will be based on midterm (30%) and a final exam (70%)
Attendance Policy
Due to the nature of a typical finance course, regular attendance is required. Unreported
absence will be counted in the final evaluation. Only valid medical or family
emergencies qualify as an absence, and documentation of the same must be presented
to the professor no later than the next class meeting. All other absences are considered to
be unexcused. Unexcused absences will affect your grade (see below).
Penalties for unexcused absences:
1 absence – class participation grade drops one full letter grade (example: A- to B-)
2 absences – class participation grade drops two full letter grades
3 absences – class participation grade drops three full letter grades
4 or more absences – class participation grade is a failing grade
Academic Honesty Statement
Please refer to the following web link for policies on academic honesty:
http://www.luc.edu/academics/catalog/undergrad/reg_academicintegrity.shtml
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Required text
E.David, Arthur.I.S and Michael.H.M, 2007, Multinational Business Finance, 11th
Edition, Pearson, ISBN0-321-55956-8.
Course coverage
Lecture 1: An Overview of International Monetary Systems and Recent
Developments in International Financial Markets
The Changing Financial Landscape, The Expanding Menu of Financial
Choices, Greater Volatility as a Feature of Financial Markets, Increased Competition
within and among Financial Markets, Financial Crises and Contagion among
International Financial Markets , International Monetary Arrangements in Theory and
Practice,.
Lecture 2: Balance of Payments
The definition of international economic transactions; BOP accounting: current
account, the capital and financial accounts; current and financial account balance
relationships, the interaction between the current account and key macroeconomic
variables.
Lecture 3: Foreign exchange markets (I): Institution and PPP
Market Structure and Institutions: Origins of the Market, A Close-Up View on
Foreign Exchange Trading ,Explaining the Profitability of Foreign Exchange Trading ,
Comparing the Foreign Exchange Market with Other Markets, Controls over Foreign
Exchange Trading
Purchasing Power Parity: Purchasing Power Parity in a Perfect Capital Market, The
Law of One Price, Absolute Purchasing Power Parity Relative Purchasing Power
Parity , The Real Exchange Rate and Purchasing Power Parity, Managerial Decisions,
Purchasing Power Parity and Product Pricing Decisions
Lecture 4: Foreign exchange markets (II): Interest Rate Parity and the Fisher
Parities
The Relationship between Interest Rates, Spot Rates, and Forward Rates, Interest Rate
Parity in a Perfect Capital Market, Empirical Evidence, The Fisher Parities ,The
International Fisher Effect
Application 1: Interest Rate Parity and One-Way Arbitrage
Application 2: Interest Rate Parity and the Country Risk Premium
Application 3: International Fisher Effect, Long-Term Bonds, and Exchange Rate
Predictions
Lecture 5: Foreign exchange markets (III): Spot Exchange Rate determination
An Overview of the Flow Approach and the Stock Approach, Asset Models of the
Spot Exchange Rate, The Monetary Approach, The Portfolio-Balance Approach,
Empirical Evidence on Exchange Rate Models, Policy Matters for private
Enterprises and public policymakers
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Lecture 6: Foreign exchange markets (IV) Offshore Financial Markets (I)The
Eurocurrency Market
Historical Overview , The Origins of Supply and Demand for Offshore Banking,
The Offshore Markets Endure, Growth of the Eurocurrency Market , Pricing of
Eurocurrency Deposits and Loans, Can Offshore and Onshore Markets Coexist? The
Impact of Capital Controls and Taxes , Policy Matters
Lecture 7: Offshore Financial Markets (II) The Eurobond Market
Historical Overview and Dimensions of the Eurobond Market, The Eurobond Market
Endures , Regulatory and Institutional Characteristics of the Market, Issuing Costs,
Ratings, and Exchange Listings, Market Segmentation and the Pricing of Eurobonds,
Onshore-offshore Arbitrage Opportunities, Using the Eurobond Market to Enhance
the Value of the Firm
Lecture 8: Derivative Security Markets: Futures, Options, and Swaps
Distinctions between Futures and Forwards, Cash Settlement and Delivery versus
Marking-to-Market Convention, Futures Pricing and Forward Pricing, Option Pricing:
Formal Models, Empirical Evidence on Option Prices, Arbitrage Boundary
Conditions , Pricing Efficiency and Pricing Biases, Origins and underpinnings of the
Swap Market, The Basic Cash Flows of a Swap Transaction, Currency Swap.
Lecture 9: Foreign Exchange exposure
Types of foreign exchange exposure, why hedge? Measurement of transaction
exposure, measurement of operating exposure, strategy choice and outcome.
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