Newcastle University

Aims

The module aims to enable students:
• To develop understanding of the international investment environments and the latest developments in the international finance arena.
• To absorb the principles essential to the understanding of global financial problems and the policies and practices multinational companies use to contend with these problems.
• To apply theories and quantitative analytical tools to effectively evaluate international risks and make financial decisions.

Original Summary:
Today’s financial markets are truly global in nature. No student of economics or finance would be able to fully understand current developments in the world without some background in international finance. This module covers the practical issues of international finance and summarises the current relevant literature. The module is self-contained as only understanding of the fundamentals of microeconomics, macroeconomics, and elementary calculus is expected. After completion of the course students will be equipped with adequate theories and tools and be able to apply them to real world issues.

Outline Of Syllabus

? Introduction: Globalization and international finance.
Globalisation of the world economy: describe the major trends. Explain the concept of corporate governance and discuss the comparative corporate governance. Presents the goals for international financial management. .

? The international monetary system and the national balance of payments.
Presents a brief history of international monetary system. Introduces the theories of balance of payments and their implications for exchange rate determination.

? Foreign exchange spot and forward markets. Spot and forward quotations. Bid-ask spread. Cross rate. Triangular arbitrage. Covered interest arbitrage. The relationships between spot rates and forward rates.
Describe the functioning of foreign currency markets. Introduce spot markets and forward markets. Exchange rate quotation: direct/indirect, bid/ask spread. Explain triangular arbitrage. Discuss dimensions of the foreign currency markets and the relationships between spot and forward contracts. Introduce forward market hedge and money market hedge. Discuss covered/uncovered interest rate parity.

? Equilibrium parity relationships in the goods, money and foreign exchange markets.
Discuss arbitrage and equilibrium parity relationships in the goods, money and foreign exchange markets; interest parity. Define real and nominal exchange rates. Explain the Fisher hypothesis about the relationship between expected inflation and nominal interest rates within and across different countries. Discuss purchasing power parity and exchange rates relationships. Discuss real interest rates, real exchange rates and their effects on asset values.

? Identification, measurement and management of exchange risk exposure. Types of exchange risk exposures. Economic exposure.
Discuss foreign exchange risk and exposures what are they and which exposures should be hedged. The nature and management of economic exposure.
? Management of transaction exposure. To hedge or not to hedge. Payoff profiles of different techniques.
Discuss various methods available for the management of transaction exposure facing multinational firms. Forward market hedge. Money market hedge. Options market hedge.

? Foreign Direct Investment Theory and Strategy.
Introduce the theory of comparative advantage. Explain the OLI Paradigm and Internalisation. Discuss the decision of where to invest and how to invest abroad (modes of foreign involvement). Explain why firms invest overseas: trade barriers; imperfect labour market; intangible assets; vertical integration; product life cycle; shareholder diversification services.
? Cross-Border Mergers and Acquisitions, and Valuation. International Capital Structure and the Cost of Capital.
Discuss the Cross-Border Mergers and Acquisitions drivers and process. Complexities of budgeting for a foreign project. The Cost of Capital in Segmented versus Integrated Markets. Capital Asset Pricing under Cross-Listings. Discuss the effect of foreign equity ownership restrictions.

? Capital budgeting for foreign direct investment projects. Foreign vs. domestic investment: Difficulties in evaluating foreign projects’ cash flows; home vs. foreign perspective.
Compares the capital budgeting analysis of a MNC subsidiary with that of its parent. Demonstrates how multinational capital budgeting can be applied to determine whether an international project should be implemented.

Teaching Rationale And Relationship

N/A

Assessment Rationale And Relationship

The examination is an appropriate method of assessing knowledge, theoretical understanding and problem solving skills under time constraints as experienced in the industry.