MASTER PROGRAMS
Spring Semester
2008/2009
COURSE SYLLABUS
INTERNATIONAL FINANCIAL MANAGEMENT
Instructor: Natalya Turkovskaya, PhD, Associate Professor
nturkovskaya@som.pu.ru
Organization of the course
Program
Year
Course status
Workload
Prerequisites
Teaching methods
Bachelor program (080500 «Management»)
4-th year
Elective
6 ECTS, 60 hours of classes
Financial Management
Lectures, group work, exercises, presentations, case study,
home and class assignments
Course objectives
 to give a deep understanding of the conceptual framework of international financial
environment;
 to provide theoretical and practical skills of international financial system functioning;
 to dissect various types of financial instruments, such as currencies, stocks, debt instruments,
derivatives, significant for internationally operating companies;
 to develop basic skills of currencies, underlying securities and derivative instruments trading
and valuation.
Course content
Topic 1.Globalization and the Multinational Firm. International Monetary System.
Topic 2. Foreign Exchange Market. Parity Conditions in International Finance and Currency
Forecasting.
Topic 3. Balance of Payments and International Economic Linkages. Corporate Governance
around the World.
Topic 4. International Banking and Money Market.
Topic 5. International Bond Market.
Topic 6. International Equity Markets.
Topic 7. Futures and Options on Foreign Exchange. Currency and Interest Rate Swaps.
Topic 8. International Portfolio Investments. Management of Transaction Exposure.
Topic 9. Foreign Direct Investment and International Trade Finance.
Topic 10. International Capital Structure and the Cost of Capital. Multinational Cash
Management.
1
Plan of classes
Topic 1. Globalization and the Multinational Firm. International Monetary System
Class 1.
Preliminary
assignment
February, 11
14.45-16.15
16.30-18.00
18.10-19.40
Room 506
Required reading for class:
– Eun, Resnick: Ch.1, 2
– Financial crisis tests durability of globalization / Financial Times.
October, 10, 2008.
Key points:
– Introduction to the course.
– Specialties of international finance and goals for international
financial management.
– Definition of globalization and the major trends of the globalized
world.
– The core of multinational corporations and the theory of
comparative advantage.
– Definition of the International Monetary System (IMS),
consideration of its evolution.
– Overview of exchange rate arrangements, its particularities.
– The current exchange rate arrangements.
– The Euro and the European Union.
Learning outcomes: Students should be able to:
– Define the core of international finance and goals for international
financial management.
– Perceive the basic trends of globalization, sense of them for
multinationals.
– Describe the evolving process of IMS, contemporary currency
regimes; give examples of different types of exchange rate
arrangements in the contemporary world and express own opinion
about merits and demerits of fixed and flexible exchange rate
regimes.
– Explain the features of European Monetary Union, perspectives of
its expansion in the international finance.
Assignments for class 2:
Reading:
– Eun, Resnick: Ch. 5, 6
– Anne-Marie Gulde. Exchange Rate Regimes for Transition
Economies: Were Currency Boards are Efficient Choice? / Report
on the Second International Scientific and Practical Conference
«Efficient Monetary Policy Options in Transition Economy». May,
19-20, 2008, Minsk.
–
Mini-case: Will the UK join the Euro club?/ Eun, Resnick, p. 57.
2
Topic 2. Foreign Exchange Market. Parity Conditions in International Finance and
Currency Forecasting.
Class 2.
February, 18
14.45-16.15
16.30-18.00
18.10-19.40
Room 506
Key points:
– Discussion: exchange rate arrangements for transition economies.
– Case discussion: «Will the UK join the Euro club?».
– Definition of Foreign exchange (FX) market, its framework,
specialties of functioning.
– Spot market, cross rates and triangular arbitrage.
– Forward market. Forward quotations and positions.
– Forward premium and swap transactions.
– Interest rate parity (IRP) and the Law of one price.
– Covered and uncovered interest arbitrage.
– IRP and exchange rate forecasting: relationships and deviations.
– Purchasing Power Parity (PPP): core, deviations and the real
exchange rate.
– Fisher effect and international Fisher effect
– Different approaches of currency predictions in the terms of PPP.
Learning outcomes: Students should be able to:
– Define the major components of FX market and explain how it
operates.
– Calculate FX spot and forward rate quotations, cross rates,
triangular arbitrage, forward premium or discount.
– Dispute utility of FX forward contracts for international
transactions.
– Reveal and treat in proper way the relationships between different
financial indicators – spot and forward exchange rates, interest
rates, inflation, real and nominal interest rates.
– Test empirically whether international parity conditions hold in
particular business situation.
– Use covered and uncovered interest rate arbitrage in practice.
Assignments for class 3:
Reading:
– Eun, Resnick: Ch. 3, 4.
– Mini-case: Shrewsbury Herbal Products, Ltd. / Eun, Resnick, p.
130
Individual home assignment №1(deadline – February 24, 18.00):
– Internet exercise: apply triangle currency arbitrage technique for
particular market situation (any market quotations), involving 3
currencies.
Individual home assignment №2 (deadline – March 3, 18.00):
– Internet exercise: Find an opportunity for covered interest arbitrage
in international FX market, using two currencies.
3
Topic 3. Balance of Payments and International Economic Linkages. Corporate Governance
around the World.
Class 3.
February, 25
14.45-16.15
16.30-18.00
18.10-19.40
Room 506
In-class assignment: Mini-test: Exercises on topics 1, 2.
Key points:
– Case discussion: « Shrewsbury Herbal Products, Ltd.».
– Balance-of-payments accounting and its accounts.
– Balance-of-payments identity.
– Balance-of-payments tendencies in major countries.
– Governance of the public corporation.
– Different types of corporate governance mechanisms.
– Law and corporate governance worldwide. Corporate governance
reform and its consequences.
Learning outcomes: Students should be able to:
– Describe the balance-of-payments method for the state accounting:
its core, goals and instruments.
– Reveal and treat major trends in balance-of-payments worldwide.
– Determine the relationship between the macroeconomic indicators
and the state of balance-of-payment of a particular country.
– Explain internal and external corporate governance mechanisms at
the multinational.
– Describe corporate governance models applied in different
countries.
– Find out the relationship between corporate control and equity
markets and business efficiency of a company.
– Illustrate the core and effects of corporate governance reform.
Assignments for class 4:
Reading:
– Eun, Resnick: Ch. 11.
– Mickael U. Klein. The international financial crisis. What next for
emerging markets? / World Bank. November, 6. 2008.
– Carmen M. Reinhart, Kenneth S. Rogoff. Banking crises: an equal
opportunity menace / NBER, working paper 14587. December
2008. Pp. 19-23, 26-33, 45-46.
– Ana Gonzalez Ribeiro. Are CDs Good Protection For The Bear
Market? / Investopedia. December 2008.
– Steven Sloan. Fed Gains More Power, But Faces New Problems /
American Banker. December, 23. 2008.
– Mini-case: Mexico’s Balance-of-Payments Problem/ Eun, Resnick,
p. 76.
– Mini-case: Parmalat: Europe’s Enron/ Eun, Resnick, p. 101.
4
Topic 4. International Banking and Money Market.
Class 4.
March, 4
14.45-16.15
16.30-18.00
18.10-19.40
Room 506
Key points:
– Case discussion: «Mexico’s Balance-of-Payments Problem».
– Case discussion: « Parmalat: Europe’s Enron».
– Reasons for international banking. Banking services and types of
international banking offices.
– Capital adequacy standards.
– Eurocurrency market. Eurocredits.
– Forward rate agreements.
– Euronotes. Eurocommercial paper.
– International debt crisis and banking crisis. Debt-for-equity swaps
and brady bonds.
– Discussion of aspects of international banking crisis.
Learning outcomes: Students should be able to:
– Reveal and treat properly current situation and trends at the
international currency markets and money markets.
– Identify the specifics of international money market instruments,
their possible use by multinational companies.
– Perceive core, causes and consequences of current financial crisis
on the whole and for multinationals, interrelate the current financial
calamities with certain processes.
Assignments for class 5:
Reading:
– Eun, Resnick: Ch. 12.
– Michael Schmidt. Bonds For Every Stage Of Life / Investopedia.
2008.
– Christina Granville. Spice Up Your Portfolio With International
Bonds / Investopedia. 2008.
– Muhammad al-Bashir Muhammad al-Amine. The islamic bonds
market: possibilities and challenges / International journal of
islamic financial services. Vol. 3, №1, June 2001.
– Lahem al Nasser. The Risks Entailed in Islamic Bonds / Asharq
Alawsat. February, 6. 2008.
– Mini-case study: Sara Lee Corporation’s Eurobonds / Eun,
Resnick, p.312.
Individual home assignment № 3 (deadline – March 24, 18.00):
– Essay: Perspectives of the world monetary system. The world
without Dollar – is it possible?
Topic 5. International Bond Market.
Topic 6. International equity markets.
Class 5.
March, 11
14.45-16.15
16.30-18.00
Key points:
– International bond markets.
– Foreign bonds and Eurobonds. Global bonds.
5
18.10-19.40
Room 506
–
–
–
–
–
–
–
–
Types of bonds.
International bond market credit ratings
Eurobond market structure and practices. International bond market
indexes.
Discussion: International bond market. Islamic bonds as an
alternative to the western approach to the bond market.
Case-discussion: «Sara Lee Corporation’s Eurobonds».
International equity markets.
Equity market structure and trading practices.
International equity market benchmarks.
Learning outcomes: Students should be able to:
– Describe the structure of the international bond market, specialties
of different types of bonds.
– Read and interpret bond quotations.
– Identify factors that impact bond prices and yields in international
markets.
– Discuss how bond issues are used in practice for multinationals.
– Report on structure and trading specifics at the international equity
markets.
– Certain and use in practice international equity benchmarks.
Assignments for class 6:
Reading:
– Eun, Resnick: Ch. 13.
– Melanie Wright and Kathryn Cooper. Beat the stock market’s lost
decade / The Sunday Times. February 8, 2009.
– Ali Hussain. Investors buy gold during recession / The Sunday
Times. February 8, 2009.
– Ana Gonzalez Ribeiro. Greenshoe Options: An IPO's Best Friend /
Investopedia. November 2008.
– Jay R. Ritter. Differences between European and American IPO
Markets / European Financial Management. Vol. 9, № 4.
December 2003. Pp. 421-434.
– Simeon Djankov. When Will Stocks Rebound in Eastern Europe? /
World Bank. January, 22. 2009.
– Mini-case: San Pico’s New Stock Exchange, p. 335
–
Group work (to be presented at the class 7)::
Analysis of Russian multinational company position at the
domestic vs. foreign debt market: process of debt history creation
and present situation (company to be specified for each group).
Topic 6. International equity markets (cont.).
Topic 7. Futures and Options on Foreign Exchange. Currency and Interest Rate Swaps.
Class 6.
March, 18
14.45-16.15
16.30-18.00
Mid-term exam, based on topics 1-5
Key points:
– Trading in international equities. Cross-listing of shares.
6
18.10-19.40
Room 506
–
–
–
–
–
–
–
Initial Public Offerings (IPO) worldwide. European stock market.
American depository receipts (ADR), Global Registered Shares
(GRS).
Discussion: Contemporary situation in the international equity
market, its consequences and possible remedies.
Case-discussion: «San Pico’s New Stock Exchange».
Financial derivatives. Foreign currency futures.
Differences between futures and forward contracts.
Basic currency future relationships.
Hedging and speculating with futures.
Learning outcomes: Students should be able to:
– Explain how international equity markets operate, define crosslisting of shares, features of depositary receipts programs.
– Investigate a process of company’s IPO abroad, its outcomes for
company’s market position.
– Describe and analyze the situation at the international equity
markets.
– Compare derivative products: futures contract vs. forwards, futures
vs. options.
– Identify how futures could be used for hedging and speculation.
– Characterize futures trading – futures positions, marking-to-market,
margin requirements.
Assignments for class 7:
Reading:
– Eun, Resnick: Ch. 7, 14.
– Helen Simon. Are Derivatives Financial «Weapons Of Mass
Destruction»? / Investopedia. December 2008.
– Lilla Zuill. AIG hopes to cover all derivatives with plan / Reuters.
December, 10. 2008.
–
Individual home assignment №4 (deadline –March 31, 18.00):
Internet exercise: to explore arbitrage opportunities between local
market for company’s shares and ADRs of the company crosslisted for the certain period.
Topic 7. Futures and Options on Foreign Exchange. Currency and Interest Rate Swaps (cont.)
Class 7.
March, 25
14.45-16.15
16.30-18.00
18.10-19.40
Room 506
In-class assignment: Group presentations on companies’ domestic vs.
foreign debt instruments.
Key points:
– Types of options. Calls and puts. Options positions.
– American and European options.
– Option trading. Clearinghouse. Margin requirements
– Basic option-pricing relationships.
– Types of swap and swap market quotations.
– Mechanics of interest-rate swaps.
7
–
–
–
–
Foreign currency swaps.
Interest-currency swaps.
Risk and efficiency of interest rate and currency swaps.
Discussion on risks and efficiency of derivatives.
Learning outcomes: Students should be able to:
– Create options trading strategies.
– Use options and futures for hedging and speculation.
– Read and interpret futures and options quotations.
– Apply different options positions.
– Describe different types of swaps.
– Choose between alternative derivative instruments of hedging.
– Create hedging strategy with futures, forwards, options, swaps for a
particular multinational.
Assignments for class 8:
Reading:
– Eun, Resnick: Ch. 8, 15.
–
Group work (to be presented at the class 9):
Investigation of current financial crisis causes in comparison with
previous financial crises: general features, specialties, aftermaths,
recommendations for a cure (previous crisis to be specified for
each group).
Topic 8. International Portfolio Investments. Management of Transaction Exposure.
Class 8.
April, 1
14.45-16.15
16.30-18.00
18.10-19.40
Room 506
In-class assignment: Mini-test, based on topics 6-7.
Key points:
– International correlation structure and risk diversification.
– Optimal international portfolio.
– The benefits of international. equity investing. International
diversification with ADRs, WEBS.
– International diversification with mutual and hedge funds.
– International bond investment.
– Three types of exposure.
– Forward, options, money market hedges.
– Cross-hedging.
– Hedging contingent and recurrent exposure.
– Lead and lag hedging.
– Exposure netting.
Learning outcomes: Students should be able to:
– Explain principles of international portfolio diversification.
– Select instruments of the international equity and bond markets to
compose an international portfolio.
– Form and run a diversified international investment portfolio.
8
–
–
Define transaction exposure in a particular situation.
Apply different methods of hedging transaction exposure.
Assignments for class 9:
Reading:
– Eun, Resnick: Ch. 16, 20.
– Mini-case: Enron versus Bombay Politicians / Eun, Resnick, p.
419.
Individual home assignment № 5 (deadline – April 9, 18.00):
– Create a hedging strategy for the importer (exporter) of particular
product (assignment to be specified individually).
Topic 9. Foreign Direct Investment and International Trade Finance.
Class 9.
April, 8
14.45-16.15
16.30-18.00
18.10-19.40
Room 506
In-class assignment: Group presentations on financial crises.
Key points:
– Foreign direct investment (FDI): core, efficiency, pro et contra,
risks, current situation and prospects.
– Cross-border M&A.
– Typical foreign trade transactions. Forfeiting.
– Government assistance in exporting.
– Countertrade: forms and mechanisms.
– Case-discussion: «Enron versus Bombay Politicians».
Learning outcomes: Students should be able to:
– Explain key points regarding FDI, interrelate FDI prospects to the
general situation at the international financial markets.
– Analyze the cross-border M&A market.
– Describe typical foreign transactions and the situation they take
place in.
– Expose different countertrade forms.
Assignments for class 10:
Reading:
– Eun, Resnick: Ch. 17, 19.
Topic 10. International Capital Structure and the Cost of Capital. Multinational Cash
Management.
Class 10.
April, 13
14.45-16.15
16.30-18.00
18.10-19.40
Room 502
In-class assignment: Mini-test, based on topics 8-10
Key points:
– Cost of capital, its differences among countries and depending on
extent of market integration.
– Capital asset pricing under cross-listing.
– Effect of foreign equity ownership restrictions.
9
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–
–
Management of international cash balances.
Transfer pricing and related issues.
Blocked funds.
Learning outcomes: Students should be able to:
– Expose cost of capital calculation in general case and for specific
conditions (for integration market, cross-border listing stocks,
foreign ownership restrictions).
– Describe key risks and methods of multinational cash management.
– Interrelate return of transfer pricing to its risks (essentially in the
form of tax claims).
Hours for individual consultations:
Asc. Prof. Natalya Turkovskaya
Wednesday
19.50-21.20
February, 11 – April, 8: per. Dekabristov, 16, room 506
April, 13: per. Dekabristov, 16, room 502
Calendar plan of current and final evaluation
Mid-term exam:
Announcement of coursework
results
Pre-exam consultation:
Exam:
Announcement of exam results:
March, 18, 14.45-16.15, room 506
To be announced by June, 4
April, 22, 19.00, room 506
April, 24, 14.45, room 506
April, 27, 19.00, room 506
Deadlines are specified in plan of classes.
Home assignments should be sent by e-mail to
Deadlines for home assignments nturkovskaya@som.pu.ru from official GSOM addresses with
specification of the topic. The name of the file should include
student’s name, number of the exercise.
10
Evaluation system
Current evaluation
Students’ progress is monitored during the course by three types of evaluation procedures:
– In-class assignments: tests, presentations of the group work
– Home assignments: exercises, essay
– Mid-term exam.
Final evaluation (exam)
Final evaluation is exercised by written exam. Exam test includes multiple choice questions and
exercises, open questions and exercises. Books and other materials are not supposed to be used
during the exam.
Grading system
Final grade consists of the following elements:
Element
1. Final exam (1,5 hour testwork: 25 questions, incl. calculating exercises
(40%); 2% per 1 point)
2. Mid-term exam (1,5 hour testwork: 20 questions, incl. calculating
exercises (25%); 0,5% per 1 point)
3. In-class tests (3 testworks, each of that lasts 45 minutes and consists of 10
questions (30%), incl. calculating exercises; 0,5% per 1 point)
3. Presentations of the group work (1 presentations on 1 of 2 themes: 2%
for material adequacy (incl. time and logical actuality and authenticity); 2%
for revealing relationships and depth and originality of inference; 2% for
visualty - logic and good perceived slides; 2% for personal presentations concise and explicit report; 2% for teamwork ability)
4. Home assignments (5 assignments: 3% per 1 of them)
TOTAL
Weight
50%
10%
15%
10%
15%
100%
Required textbooks
1.
Eun C., Resnick B. G. International Financial Management. 4-th ed. McGraw-Hill, 2007
Other required reading
1.
Anne-Marie Gulde. Exchange Rate Regimes for Transition Economies: Were Currency
Boards are Efficient Choice? / Report on the Second International Scientific and Practical
Conference «Efficient Monetary Policy Options in Transition Economy». May, 19-20, 2008,
Minsk.
2.
Mickael U. Klein. The international financial crisis. What next for emerging markets? / World
Bank. November, 6. 2008.
3.
Carmen M. Reinhart, Kenneth S. Rogoff. Banking crises: an equal opportunity menace /
NBER, working paper 14587. December 2008. Pp. 19-23, 26-33, 45-46.
4.
Ana Gonzalez Ribeiro. Are CDs Good Protection For The Bear Market? / Investopedia.
December 2008.
5.
Steven Sloan. Fed Gains More Power, But Faces New Problems / American Banker.
December, 23. 2008.
11
6.
Michael Schmidt. Bonds For Every Stage Of Life / Investopedia. 2008.
7.
Christina Granville. Spice Up Your Portfolio With International Bonds / Investopedia. 2008.
8.
Muhammad al-Bashir Muhammad al-Amine. The islamic bonds market: possibilities and
challenges / International journal of islamic financial services. Vol. 3, №1, June 2001.
9.
Lahem al Nasser. The Risks Entailed in Islamic Bonds / Asharq Alawsat. February, 6. 2008.
10. Ana Gonzalez Ribeiro. Greenshoe Options: An IPO's Best Friend / Investopedia. November
2008.
11. Jay R. Ritter. Differences between European and American IPO Markets / European Financial
Management. Vol. 9, № 4. December 2003. Pp. 421-434.
12. Simeon Djankov. When Will Stocks Rebound in Eastern Europe? / World Bank. January, 22.
2009.
13. Helen Simon. Are Derivatives Financial «Weapons Of Mass Destruction»? / Investopedia.
December 2008.
14. Articles from Financial Times, The Sunday Times, Reuters (specified in the plan of classes,
might be updated).
List of cases used in the course
1.
Will the UK join the Euro club?/ Eun, Resnick, p. 57.
2.
Shrewsbury Herbal Products, Ltd. / Eun, Resnick, p. 130.
3.
Mexico’s Balance-of-Payments Problem/ Eun, Resnick, p. 76.
4.
Parmalat: Europe’s Enron/ Eun, Resnick, p. 101.
5.
Sara Lee Corporation’s Eurobonds / Eun, Resnick, p.312.
6.
San Pico’s New Stock Exchange, p. 335.
7.
Enron versus Bombay Politicians / Eun, Resnick, p. 419.
12