Special Topics in International Finance

Contact

Pre-requisites

The student should have taken a course in intermediate macroeconomic and microeconomic theory at the undergraduate level.

Lecture topics

The lecture topics are:

1. Foreign Exchange Markets and Foreign Exchange Risk
2. Managing Foreign Exchange Risk by Outright Forwards and Currency Options
3. Portfolio Theory and International Diversification
4. Uncovered Interest Rate Parity Theory and its Consequences for Exchange Rate and Foreign Debt
5. Long-term Funding, Foreign Debt and Managing Foreign Exchange Risk by Currency Swaps
6. Global Liquidity and Banking System Liquidity in Case of Balance of Payment Deficit in Eurozone
7. Balance of Payment Deficits, Capital Flows and Sustainability of Negative International Investment Positions

Course contents

This course surveys a few key topics that deals with foreign exchange risk, funding in global financial markets and sustainability of foreign debt. The initial focus of the course is on the functions and organization of foreign exchange markets, the nature of foreign exchange risk and management of foreign exchange risk using two main financial derivatives – outright forwards and currency swaps. Following this, we turn our attention to capital flows, theory of portfolio and main benefits of international diversification. Then the discussion of capital flows in global financial market continues explaining a problem of foreign debt within uncovered interest rate parity, foreign debt currency risk management and interlinkages between debt markets via currency swaps. The course concludes with the analysis of balance of payment deficits, their funding via net inflow of foreign capital with special focus on ECB facilities provided liquidity to the PIGS countries banking systems and sustainability of negative net international investment positions as a natural consequence of chronic balance of payments deficits.

This is a lectures-based course. The readings are drawn from the literature. Students will be provided with hand-outs.

Core reading

A basic reference text for the discussion of foreign exchange markets, financial derivatives, currency risk management and portfolio theory is Cheol Eun and Bruce Resnick, International Financial Management, McGraw Hill, 8th Edition, 2018.

A basic reference text for analysis of balance of payment deficits, funding in foreign markets and foreign debt is Hans Werner Sinn, The Euro Trap: On Bursting Bubbles, Budgets, and Beliefs, Oxford University Press, 2014.

Learning outcomes

This course aims at

• understanding the functions of foreign exchange markets, traded financial instruments and nature of foreign exchange risk
• comparing main pros and cons of using outright forwards and currency options for currency risk management
• understanding main benefits and risks of international diversification in terms of portfolio theory
• providing macroeconomic context of foreign capital flows, liquidity creation and balance of payment deficits in Eurozone countries
• defining the factors crucial for sustainability of negative international investment position included changes needed to restore external solvency

Organisation

The course is taught as an intensive course, over two weeks.

Assessment

Students are evaluated through a written exam of three hours that assesses all the relevant learning outcomes.