PROGRAM SPECIFICATION
INTERNATIONAL FINANCIAL MANAGEMENT
WEEKLY COURSE (30-HOUR)
MARCH 2006
Instructor : Robert Dubil
1- Main Purpose
Aims
The course examines the impact of a firm’s internationalization on its decision-making
process. We start with an overview of the global financial marketplace and examine the
world’s trade and exchange rate arrangements. We study the functioning of the markets for
currencies, international bonds, equities, and related derivatives and zero in on the arbitragebased linkages to develop a deep understanding of the environment faced by the chief
financial officer of a multinational corporation. Then we change our focus to the firm’s own
operations to learn how the firm measures its short and long-term foreign exchange exposure.
We end by discussing the merits of operational and financial hedging by a multinational firm.
Basic requirements
To qualify the student will have been able to assess the multinational firm’s exposure to FX
risks, examine the global market environment and financing alternatives it offers, and to
formulate the adequate hedging strategy for the firm.
Special features
Students will gather global macroeconomic and financial markets data on the Internet.
Students will also use MS Excel to solve homework assignments. These will provide an indepth view into the functioning of the institutional currency and bond markets.
2. Admissions
Entry Requirements
Necessary to have successfully passed the course of Financial Mathematics that provides the
basic tools for financial calculus.
3. Learning Outcomes
Knowledge and understanding in the context of the subject
Macroeconomic background of the different trade and currency areas
Knowledge of the arbitrage linkages in the international capital markets
Ability to assess a firms economic currency exposure
Ability to justify the choice of the hedging alternatives
Cognitive skills
Ability to interpret economic figures
Ability to translate projects into mathematical calculations
Ability to take risks and to justify such decisions
Ability to value potential economic activity of a sector/country
Subject-specific skills
Ability to read a country’s balance of payments
Ability to interpret capital market events
Exchange rate determination and calculation of forward exchange rate
Arbitrage-based calculus of fixed-income and currency linkages
Ability to understand and use derivates like swaps and options
General/transferable skills
Ability to assess an economic situation and to form expectations
Ability to separate economic and political statements
Ability to take decisions in a risky context
Ability to translate projects into figures and financial operations
Ability to apply formulae/ read graphics
Qualities, skills and capabilities profile
Intellectual:
Analytical and critical thought
Ability to solve problems and to interpret data
Openness to new methods and concepts especially regarding new methods of
valuing investment decision
Practical
Research skills and methods
Mastery of the latest instruments in capital markets
Written presentation skills
Personal and social
Independence
Planning skills
Analytical learning skills
4. Learning and teaching methods
Methods
Lectures, Internet data gathering, interactive exercises and a mini-case study on transaction
exposure, Excel assignment summarizing market linkages, final written exam
Students are required to read all the assigned chapters and complete Assignment 1 before the
start of the course
Assessment:
- Exercises and mini-cases (individual and/or team-work) 30%
- Final written exam 60%
- Multi-disciplinary exam 10%
5. Bibliography
C. Eun and B. Resnick, “International Financial Management”, 3rd Ed., McGraw-Hill, 2004
R. Dubil, “An Arbitrage Guide to Financial Markets”, J. Wiley, 2004
T. O’Brien, “Global Financial Management”, unpublished reader, 2001
Files at: www.business.utah.edu/~finrd under ESC Rouen 06
www.economist.com
www.ft.com
www.ecb.int
www.quotes.ubs.com
6- To pass the course the student needs at least to have understood correctly the
following principles:
1- the balance of payments, in particular the relationships between current-account balance /
capital account balance and the rate of exchange;
2- the structure of international financial markets, in particular the Eurodollar market;
3- the interest rate parity theory of the exchange rate;
4- the forward market for exchange rates and the market for derivatives, in particular interest
rate swap – currency swap and options on exchange rates;
5- corporate revenue and profit exposure in monopoly and competitive environments
6- operational hedging
International Financial Management
Program Overview & Reading List
Reading Assignment
Part One : Global Macroeconomy
1- World Trade
2- International Monetary System
3- Balance of Payments
ER-1
ER-2
ER-3
Part Two: Global Financial Markets and Corporate Financing Decisions
1- Spot and Forward Currency Markets
ER-4&5; D 27-49, 64-66
23456-
D 135-162
D 162-173; ER 138-43, 200-09
ER-5; D 175-81, 189-92
D 199-229; ER 143-9
ER-9; D 233-64
Forward and Futures Markets
Interest Rate Forwards and Futures
Covered Interest Rate Parity
Swap Markets and Corp. Bond Issuance
Currency Futures and Options
Part Three: Corporate Investment, Exposure and Hedging
1- Revenue and Profit Exposure
2- Operational Hedging
3- To hedge or not to hedge?
Reading Assignment Legend
Textbooks: ER=Eun and Resnick; D=Dubil; OB=O’Brien;
Reference hyphenated with a number=Chapter, eg. ER-5;
Reference spaced with numbers=Page numbers, eg. ER 143-9.
OB-5&6
OB-5&6
International Financial Management
Assignment List
Homework assignments are intended to prepare you for the final exam. They are a lot of
work! Please work on them prior to the start of the course, so that you can have as few as
possible left to finish during the week of the course. Work through all of them, but by 4:30
pm on Thursday, March 16, hand in the following problems (written or typed): Hmk1: 1, 2,
5; Hmk2: 4; Hmk3: Part 2; Hmk4: 6, 8; Hmk5: 1, 2; Hmk6: 2, 4, 5; Hmk7: 2.
HOMEWORK 1
1. Eun/Resnick Problem 2, p.25, with X and Y exchanging textiles for food at free market
terms of trade equal to 3.0, i.e 3 units of food for 1 unit of textiles.
2. Eun/Resnick Problem 2, p.25, with X and Y exchanging textiles for food at free market
terms of trade equal to 3.0, i.e 3 units of food for 1 unit of textiles.In addition, assume that
the rich country X imposes a 10% tariff on textiles from the poor country Y. How will the
final consumption change?
3. What countries have adopted flat tax? How much tax do they collect pre- and postadoption of the flat tax? What has their GDP growth been pre- and post-flat tax?
4. Contrast the EU with the U.S. in terms of the free movement of labor, goods and capital.
Be specific and concise. Write as many bullet points as possible.
5. Research macroeconomic statistics for North America (or the U.S. alone), Europe, Japan
and China. Compare the economies of these four regions in terms of size (GDP), wealth
(GDP per capita), trade and balance of payments trends. Summarize the stats you could
find.
HOMEWORK 2
1. From ER-2, pp.56-57: Questions 2, 6, 10.
2. Why do you think Britain did not join the euro in 2003?
3. Do all exercises in review1.doc again without looking at your class notes.
4. You purchase a 3-year $100,000 face value discount bond for $90,000. a. What annual
yield are you locking in? b. What semi-annual yield are you locking in? c. What quarterly
yield are you locking in?
HOMEWORK 3
Part 1
Set up a spreadsheet bond.xls to compute the yield to maturity on bonds with different
maturities and coupons.
1. Compute ytm on a 6-year 4.5% semi-annual coupon bond selling for 99.25.
2. Compute ytm on a 4-year 6% annual coupon bond selling for 102.31.
3. Compute the coupon rate on a 5-year annual bond yielding 5% and selling for 99.
Part 2
You observe discount rates: 1-yr 3.5%, 2-yr 3.75% and 3-yr 4.00%, and par coupon rates of:
1-yr 3.5% and 2-yr 3.7454%. (Par rate means coup=ytm and price=100.) All rates are annual.
1. What should the 3-yr par coupon rate be?
2. A dealer quotes 4.20% for the 3-year par coupon rate instead of the rate you computed
in 1. How can you profit?
Part 3
From ER-3, p. 71: Questions 1, 3, 4, 8.
HOMEWORK 4
Refer to ER-4, end-of-chapter problems.
P2. Using Exhibit 4.4, calculate the one-, three-, and six-month forward cross-exchange rates
between the Canadian dollar and the Swiss franc using the most current quotations. State the
forward cross-rates in “Canadian” terms.
P3. Restate the following one-, three-, and six-month outright forward European term bid-ask
quotes in forward points.
Spot
1.3431-1.3436
One-Month
1.3432-1.3442
Three-Month
1.3448-1.3463
Six-Month
1.3488-1.3508
P4. Using the spot and outright forward quotes in problem 3, determine the corresponding
bid-ask spreads in points.
P5. Using Exhibit 4.4, calculate the one-, three-, and six-month forward premium or discount
for the Canadian dollar in European terms. For simplicity, assume each month has 30 days.
P6. Using Exhibit 4.4, calculate the one-, three-, and six-month forward premium or discount
for the British pound in American terms using the most current quotations. For simplicity,
assume each month has 30 days.
P7. Given the following information, what are the NZD/SGD currency against currency bidask quotations?
Bank Quotations
New Zealand dollar
Singapore dollar
American Terms European Terms
Bid
Ask
Bid
Ask
.4660 .4667
2.1427 2.1459
.5705
.5710
1.7513 1.7528
P8. Assume you are a trader with Deutsche Bank. From the quote screen on your computer
terminal, you notice that Dresdner Bank is quoting €1.0242/$1.00 and Credit Suisse is
offering SF1.5030/$1.00. You learn that UBS is making a direct market between the Swiss
franc and the euro, with a current €/SF quote of .6750. Show how you can make a triangular
arbitrage profit by trading at these prices. (Ignore bid-ask spreads for this problem.) Assume
you have $5,000,000 with which to conduct the arbitrage. What happens if you initially sell
dollars for Swiss francs? What €/SF price will eliminate triangular arbitrage?
HOMEWORK 5
1. Spot US/EUR=1.2000, 3-month Forward US/EUR=1.2200, 3-month interest rates 4% in
the U.S., 3.5% in EUR. You can borrow or lend EUR 10,000,000=USD 12,000,000. How do
you lock in riskless profit? (CIRP)
2. Refer to the copy of futures markets quotations from the 10/4/2005 Wall Street Journal.
You expect an inflow of ₤250,000 in March 2006. What US$ amount of inflow can you lock
in by using the CME contract? How many contracts do you buy/sell? If the spot FX rate turns
out 1.7650 in March, what will have been your total variation margin on the contracts? What
amount will you obtain in the spot market? Show that you have in fact locked in the desired
US$ amount.
HOMEWORK 6
1. Do you think the fact that Japanese companies have enjoyed low interest rates at home
(Toshiba can issue JPY debt at less than 1%) has given them an advantage over companies
from high interest rate countries like the U.S. (Toshiba can issue USD debt at 3%)? What
can the government do to level the playing field?
2. You entered into a 5-year $100 million USD-floating, AUD-fixed cross currency swap.
You receive USD LIBOR+30 bp quarterly and you pay 5% annually in AUD. The spot FX
rate is USD/AUD 0.65. Describe the cash flows assuming USD LIBOR will stay at 3%.
3. Consider the swap in 2. You also observe that interest rate swaps in the U.S. trade at 3.50%
semi against quarterly LIBOR flat. Suppose you decide, in addition to the swap in 2 to
receive (fixed) on a 5-year U.S. swap against LIBOR+30. Show your net cash flows
graphically.
4. A year ago, you entered into a $200 million 6-year annual payment swap: receive 4% fixed
USD and pay 5.2% fixed EUR. The spot FX rate at the time was 1.00 and it is still the
same. However, 5-year rates now are 3% in the U.S. and 4% in Europe. How much do you
have to pay/receive to “unwind” the swap?
Putting it all together:
5. All rates are semi. Simple 30/360 day count (divide by 2). Six-month spot Libor rates and
subsequent FRA rates trade at:
USD
SPOT
FRAs
0x
6x
12 x
18 x
24 x
30 x
36 x
42 x
48 x
54 x
60 x
66 x
72 x
78 x
6
12
18
24
30
36
42
48
54
60
66
72
78
84
EUR
2.00
2.05
2.10
2.15
2.20
2.25
2.30
2.35
2.40
2.45
2.50
2.55
2.60
2.65
3.00
3.07
3.14
3.21
3.28
3.35
3.42
3.49
3.56
3.63
3.70
3.77
3.84
3.91
The spot FX rate is USD/EUR 1.18. Answer the following (assume $100 million notional for
a swap, where applicable).
a) Compute zero-coupon rates in both currencies.
b) Compute forward FX rates.
c) Compute 5- and 7-year par (interest rate) swap rates in both currencies.
d) Describe the cash flows for a USD par interest rate swap (receive fixed, pay floating),
assuming Libor rates in the future are exactly equal to the forwards.
e) Consider a fixed-for-fixed currency swap, receive USD, pay EUR, with both rates equal to
the computed par swap rates. Describe the cash flows.
f) Compute the PVs for the USD receipts and EUR payments using the zero (discount) rates
from a) and the current spot FX rate. Show that the PV of the entire swap in dollars is
zero.
g) Repeat f) using the forward FX rates in b) and only the zero rates for USD in a). Show
that the PV of the entire swap in dollars is zero.
HOMEWORK 7
1. Work through all numerical examples (UVM, UVC) in OB-5&6. Combine the treatment in
the two chapters to compute revenue and profit exposures.
2. Work through Option puzzles 13-16.
3. Review case study from the last class period. Be able to draw the scenario graph.