INTERNATIONAL FINANCIAL MANAGEMENT

FIN5IFM

2015

Credit points: 15

Subject outline

In this subject, students will develop an understanding of the structure and operation of the international financial system, including an understanding of the process via which exchange rates are derived. Students will also develop a thorough knowledge and understanding of the logic and relevance of the four major international parity conditions: Purchasing Power Parity; Covered Interest Parity; Uncovered Interest Parity; and Real Interest Parity. Based on their understanding of these parity conditions, students will evaluate the relative merits and the risks avoided with investing in a foreign currency.

SchoolLa Trobe Business School

Credit points15

Subject Co-ordinatorTu Nguyen

Available to Study Abroad StudentsNo

Subject year levelYear Level 5 - Masters

Exchange StudentsNo

Subject particulars

Subject rules

PrerequisitesN/A

Co-requisites FIN5DER

Incompatible subjectsN/A

Equivalent subjectsN/A

Special conditionsN/A

Readings

Resource TypeTitleResource RequirementAuthor and YearPublisher
ReadingsGlobal investmentsPrescribedSolnik B., & D.McLeaveyPEARSON ADDISON WESLEY, 2006, 6TH EDITION

Graduate capabilities & intended learning outcomes

01. 1. Interpret and calculate foreign exchange quotations ; 2. Calculate and interpret the spread on a foreign currency quotation and explain factors affecting the spread; 3. Calculate and interpret currency cross rates; 4. Distinguish between the spot and forward markets for foreign exchange; 5. Calculate and interpret a forward discount or premium and express it as an annualized rate; 6. Explain interest rate parity and illustrate covered interest arbitrage; 8. Identify and calculate the profit on a triangular arbitrage opportunity; 9. Calculate and interpret forward exchange rates given spot rates and interest rates

Activities:
Topic 1: Currency Exchange Rates (lecture and tutorial) and Assessment components
Related graduate capabilities and elements:
Inquiry and Analytical Skills (Critical Thinking,Creative Problem-solving,Inquiry/Research)
Inquiry and Analytical Skills (Critical Thinking,Creative Problem-solving,Inquiry/Research)
Discipline -Specific Knowledge and Skills (Discipline-Specific Knowledge and Skills)

02. 1. Discuss foreign exchange fundamentals; in particular the balance of payments and exchange rate regimes; 2. Discuss international parity relations and their implications; 3. Discuss exchange rate determination theories and their potential implications.

Activities:
Topic 2: Foreign Exchange Parity Relation (lecture and tutorial) and Assessment components
Related graduate capabilities and elements:
Inquiry and Analytical Skills (Critical Thinking,Creative Problem-solving,Inquiry/Research)
Inquiry and Analytical Skills (Critical Thinking,Creative Problem-solving,Inquiry/Research)
Discipline -Specific Knowledge and Skills (Discipline-Specific Knowledge and Skills)

03. 1. Discuss the evolution of international monetary arrangements; 2. Discuss the empirical evidence on the various parity conditions; 3. Discuss technical and economic analysis of exchange rate forecasting; 4. Explain and discuss the use and performance of exchange rate forecasting.

Activities:
Topic 3: Foreign Exchange Rate Determination and Forecasting (lecture and tutorial) and Assessment components
Related graduate capabilities and elements:
Inquiry and Analytical Skills (Critical Thinking,Creative Problem-solving,Inquiry/Research)
Inquiry and Analytical Skills (Critical Thinking,Creative Problem-solving,Inquiry/Research)
Inquiry and Analytical Skills (Critical Thinking,Creative Problem-solving,Inquiry/Research)
Discipline -Specific Knowledge and Skills (Discipline-Specific Knowledge and Skills)

04. 1. Explain international market integration and segmentation, and discuss the impediments to international capital mobility and discuss the factors that favor international market integration; 2. State the assumptions of the domestic capital asset pricing model (CAPM), and explain the extension of the domestic CAPM to an international context (the extended CAPM) and describe the additional assumptions needed to justify the extended CAPM; 3. Discuss the valuation and portfolio implications of international asset pricing; 4. Explain and discuss the international asset pricing model (ICAPM); 5. Discuss the relation between exchange rates and asset prices.

Activities:
Topic 4: International Asset Pricing (lecture and tutorial) and Assessment components
Related graduate capabilities and elements:
Inquiry and Analytical Skills (Critical Thinking,Creative Problem-solving,Inquiry/Research)
Inquiry and Analytical Skills (Critical Thinking,Creative Problem-solving,Inquiry/Research)
Inquiry and Analytical Skills (Critical Thinking,Creative Problem-solving,Inquiry/Research)
Discipline -Specific Knowledge and Skills (Discipline-Specific Knowledge and Skills)

05. 1. Discuss the most important issues, such as the information problem, that arise when investing internationally. In particular, contrast the major differences among national accounting standards and international accounting standards (IAS); 2. Demonstrate the various steps involved in global industry analysis: including country analysis and the stages of the business cycle; 3. Distinguish between country analysis and industry analysis; 4. Demonstrate how to conduct a global industry analysis by analyzing return potential and risk characteristics; 5. Evaluate two common approaches of equity analysis (ratio analysis and discount cash flow models including the concept of franchise value); 6. Analyze the effects of inflation on asset valuation;

Activities:
Topic 5: Equity: Concepts and Techniques (lecture and tutorial) and Assessment components
Related graduate capabilities and elements:
Inquiry and Analytical Skills (Critical Thinking,Creative Problem-solving,Inquiry/Research)
Inquiry and Analytical Skills (Critical Thinking,Creative Problem-solving,Inquiry/Research)
Discipline -Specific Knowledge and Skills (Discipline-Specific Knowledge and Skills)

06. 1. Discuss the difference between domestic bonds, foreign bonds and Eurobonds; 2. Describe ways to invest in bonds from emerging countries; 3. Review the basic concepts in bond valuation; 4. Describe the basic valuation method for straight fixed-rate bonds; 5. Compute the expected excess return (risk premium) on a domestic bond; 6. Define the implied forward exchange rate from yield curves in different currencies; 7. Explain the various sources of return and risk from an international bond; 8. Compute the expected excess return (risk premium) on a foreign bond, hedged and not hedged against currency risk; 9. Discuss the various stages of international bond portfolio management; 10. Describe, and price a floating-rate note; 11. Explain valuation principle of exotic bonds.

Activities:
Topic 6: Global Bond Investing (lecture and tutorial) and Assessment components
Related graduate capabilities and elements:
Inquiry and Analytical Skills (Critical Thinking,Creative Problem-solving,Inquiry/Research)
Inquiry and Analytical Skills (Critical Thinking,Creative Problem-solving,Inquiry/Research)
Discipline -Specific Knowledge and Skills (Discipline-Specific Knowledge and Skills)

07. 1. Distinguish between an open end and a closed end fund; 2. Explain how the net asset value of a fund is calculated; 3. Distinguish among exchange traded funds (ETFs), traditional mutual funds, and closed end funds; 4. Describe the forms of real estate investment; 5. Describe the various approaches to the valuation of real estate; 6. Explain the various stages in venture capital investing; 7. Discuss venture capital investment characteristics, valuation and performance measurement; 8. Calculate the net present value (NPV) of a venture capital project; 9. Define hedge fund, and describe the various classifications of hedge funds; 10. Discuss the leverage, unique risks, and performance of hedge funds; 11. Discuss the valuation of closely held companies;

Activities:
Topic 7: Alternative Investments (lecture and tutorial) and Assessment components
Related graduate capabilities and elements:
Literacies and Communication Skills (Writing,Speaking)
Inquiry and Analytical Skills (Critical Thinking,Creative Problem-solving,Inquiry/Research)
Inquiry and Analytical Skills (Critical Thinking,Creative Problem-solving,Inquiry/Research)
Discipline -Specific Knowledge and Skills (Discipline-Specific Knowledge and Skills)

08. 1. Evaluate the implications of international diversification for both a domestic equity and domestic fixed income portfolio based on traditional arguments regarding correlation; 2. Determine the effect of implementing international diversification on the efficient frontier; 3. Demonstrate, using a risk#return framework, the potential impact of adding bonds to a global asset allocation; 4. Discuss the characteristics of currencies in the international decision and the management of currency risk through hedging; 5. Critique the case against international diversification; 6. Critique the statement "correlation between countries' markets is truly higher in crisis periods;" 7. Distinguish between global investing and international diversification.

Activities:
Topic 8: The Case for International Diversification (lecture and tutorial) and Assessment components
Related graduate capabilities and elements:
Inquiry and Analytical Skills (Critical Thinking,Creative Problem-solving,Inquiry/Research)
Inquiry and Analytical Skills (Critical Thinking,Creative Problem-solving,Inquiry/Research)
Discipline -Specific Knowledge and Skills (Discipline-Specific Knowledge and Skills)

09. 1. Demonstrate and explain the use of foreign exchange futures to hedge the currency exposure of a foreign investment; 2. Justify the use of a minimum-variance hedge and identify and interpret the components of the minimum-variance hedge ratio; 3. Explain the role of basis risk; 4. Discuss the problems arising when hedging multiple currencies; 5. Justify the use of options as an insurance vehicle against currency risk as opposed to a hedging strategy achieved with futures/forwards; 6. Demonstrate the effectiveness of a standard dynamic delta hedge strategy when hedging a foreign currency position; 7. Discuss other forms of managing currency exposure;

Activities:
Topic 9: Currency Risk Management (lecture and tutorial) and Assessment components
Related graduate capabilities and elements:
Literacies and Communication Skills (Writing,Speaking)
Inquiry and Analytical Skills (Critical Thinking,Creative Problem-solving,Inquiry/Research)
Inquiry and Analytical Skills (Critical Thinking,Creative Problem-solving,Inquiry/Research)
Discipline -Specific Knowledge and Skills (Discipline-Specific Knowledge and Skills)

Subject options

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Start date between: and    Key dates

Melbourne, 2015, Semester 1, Day

Overview

Online enrolmentYes

Maximum enrolment sizeN/A

Enrolment information

Subject Instance Co-ordinatorTu Nguyen

Class requirements

Tutorial Week: 10 - 22
One 1.0 hours tutorial other recurrence on weekdays during the day from week 10 to week 22 and delivered via face-to-face.

Lecture Week: 10 - 22
One 2.0 hours lecture other recurrence on weekdays during the day from week 10 to week 22 and delivered via face-to-face.

Assessments

Assessment elementComments% ILO*
(4,000-word group project)case study15 01, 08, 09
mid-semester exam25 01, 02, 03, 04
one 3-hour final examinationHurdle requirement: Students must achieve at least 50% in the final examination as well as a minimum of 50% in the sum of the marks for all assessment tasks to pass the subject50 01, 02, 03, 04, 05, 06, 07, 08, 09
tutorial homework10 01, 02, 03, 04, 05, 06, 07, 08, 09

Melbourne, 2015, Semester 2, Day

Overview

Online enrolmentYes

Maximum enrolment sizeN/A

Enrolment information

Subject Instance Co-ordinatorTu Nguyen

Class requirements

Lecture Week: 31 - 43
One 2.0 hours lecture other recurrence on weekdays during the day from week 31 to week 43 and delivered via face-to-face.

Tutorial Week: 31 - 43
One 1.0 hours tutorial other recurrence on weekdays during the day from week 31 to week 43 and delivered via face-to-face.

Assessments

Assessment elementComments% ILO*
(4,000-word group project)case study15 01, 08, 09
mid-semester exam25 01, 02, 03, 04
one 3-hour final examinationHurdle requirement: Students must achieve at least 50% in the final examination as well as a minimum of 50% in the sum of the marks for all assessment tasks to pass the subject50 01, 02, 03, 04, 05, 06, 07, 08, 09
tutorial homework10 01, 02, 03, 04, 05, 06, 07, 08, 09