AMERICAN INSTITUTE OF BUSINESS AND ECONOMICS
FNCE 221
INTERNATIONAL FINANCE AND RISK MANAGEMENT
INSTRUCTOR: KONSTANTIN N. KONTOR, MBA
PURPOSE OF THIS COURSE
The main goal of this course is to provide the students with a basic understanding of the principles
of international finance (economics of the international environment, purchasing power parity, and
sources of risk in the international financial markets.) We will also discuss the theoretical
background on which the practices of operation of the international financial markets are based.
Another goal of the course is to expose the students to the Western standards, approaches, and
terminology used in the international capital markets and financial institutions worldwide.
The final goal is to discuss the real methodologies of financial decision-making and financial
analysis. The course is heavily case-based. It also covers certain issues from the Western financial
history.
COURSE MATERIALS
Selected chapters from the textbook:
Alan С. Shapiro. Multinational Financial Management, Allyn and Bacon.
Notes, articles, and cases from the course package.
GRADING
Grading of this course will be based on assignments, examinations and class participation.
Because the course is heavily case-based attendance is mandatory. Failure to attend 40% of
classes leads to immediate failure in the course and loss of credit.
During the course the students will have to submit 4 homeworks, 2 midterm case write-ups, and
take the final examination. Failure to take the final or to hand in any of the midterm case reports is
tantamount to failure in the course.
The course will be graded in accordance with the following schedule:
Class participation
10%
Homeworks
20%
Midterm I
15%
Midterm II
15%
Final
40%
TOTAL
100%
COURSE OUTLINE
1. INTRODUCTION: THE SCOPE OF INTERNATIONAL FINANCE. INTERNATIONAL MONETARY SYSTEMS
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What's different in international financial management?
International financial systems
Central bank intervention
The Bretton Woods System
2. INTERNATIONAL PARITY RELATIONSHIPS (I)
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Forward market price
Interest rate parity
Arbitrage opportunities - methodology and examples
Deviations from IRP
3. INTERNATIONAL PARITY RELATIONSHIPS (II)
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The law of one price (LOP)
Purchasing Power Parity (PPP)
Fisher effect. Cross-country relationships. International Fisher effect
Deviations from PPP. Traded and non-traded goods
4. THE NATURE OF INTERNATIONAL RISK EXPOSURE
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The nature of risks
Exchange risk
Violations in PPP and exchange risk
Exchange rate overshooting
Financial price risk
Corporations Vs. risk. Economic and accounting exposure
5. INTERNATIONAL RISK EXPOSURE - CASES (I)
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Rolls Royce and Laker Airways
Caterpillar
6. INTERNATIONAL RISK EXPOSURE - CASES (II)
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Western Mining
Merck
Discussion of the Midterm I case
7. MIDTERM I CASE PRESENTATIONS
8. REASONS FOR HEDGING INTERNATIONAL RISK EXPOSURE
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Why hedge?
Taxes
Financial distress
Cash flow exposure
Executive compensation
9. HEDGING INSTRUMENTS (I): CURRENCY OPTIONS AND FUTURES
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Currency options Vs. currency futures
When to use options rather than other instruments
Examples
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10. HEDGING INSTRUMENTS (II): CURRENCY SWAPS
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What is a currency swap?
Mechanisms of currency swaps
Case: The Walt Disney Company's Yen Financing (preparatory discussion)
11. MIDTERM II CASE PRESENTATIONS
12. CAPITAL BUDGETING IN THE INTERNATIONAL ENVIRONMENT
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Hedging: strategic reasons
Capital budgeting issues
Ways to determine the discount rate
Political risks
Strategic options - an example
Capital budgeting in Russia and other emerging markets
13. COST OF CAPITAL ACROSS COUNTRIES
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Difference in cost of capital
Cost of capital in Japan
Cost of capital in Russia
14. MULTINATIONAL TAXATION AND INVESTMENT DECISIONS - AN OVERVIEW
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How taxes affect investment decisions
Repatriation of profits and taxation
Effect of taxes on capital structure and corporate structure
Overall macro variables and international taxes
Discussion of the final exam
15. FINAL EXAM
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