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COURSE OBJECTIVEThe objective of the course is to provide an understanding of both the key features of foreign exchange markets and the actual problems of multinational corporation within an environment of free flows of foreign capital and floating exchange rates. Our attention will be especially focused on:• the architecture of foreign exchange markets• the motivation of participants in foreign exchange markets (arbitrage, speculation, hedging) • the role of conventions in exchange rates quotation and trading in foreign exchange markets• the type of foreign exchange operations (spot, forward, FX swaps, currency swaps, futures and option)• the factors that influence the price of currency derivatives (forward rate, swap points, interest rates, futures price, option premium)• the relationship between the changes of exchange rates and the dynamics of fundamental economic factors (balance of payments, inflation, interest rates, expectations)• the prediction of future exchange rates movements by the tools of technical analysis• the changes of foreign currency regime since the crash of Bretton Woods regime of fixed exchange rates• the nature of foreign exchange exposure and risk and its management• the structure of the balance of payments and main relations between economic transaction in the balance of paymentsKNOWLEDGE AND SKILLS AFTER COMPLETING THE COURSEBy the end of this course, students should be able to understand the mechanism of foreign exchange markets as well as how exchange rates are quoted. Students should understand the techniques of the main foreign exchange transactions. They should also know the factors that drive exchange rates, in particular how spot and forward rates are related to interest rates and inflation dynamics. They should also learn how to use these relations in foreign exchange rates forecasting. The course provides students with knowledge of and competence in identifying the nature of foreign exchange risk and main types of foreign exchange exposure that company face, as well as in using main techniques of hedging foreign exchange risk. They should also be aware of the most important changes in international financial environment since the end of Bretton Woods.COURSE MATERIALEiteman, D. K., Stonehill, A. I., Moffeit, M. H.: Multinational Business Finance, 8th Edition, Addison Wesley, 1999Shapiro A. C.: Multinational Financial Management, 6th Edition, Prentice Hall, 1999Materials from Finance Trainer available free of charge at http://www.financetrainer.com/english/Publications/ToolsScripts/tabid/517/Default.aspx READINGSBank for International Settlements: Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity in 2004Bank for International Settlements: Why Has Foreign Exchange Trading Surged?European Central Bank: Review of the Foreign Exchange Market StructureBartolini, L.: Foreign Exchange SwapsKiff, J., Ron, U., Ebrahim, S.: The Federal Government’s Use of Interest Rate Swaps and Currency SwapsSrinivasan, S., Youngren, S.: Using Currency Futures to Hedge Currency RiskANZ Investment Bank: Foreign Currency OptionsCavallo M.: Interest Rates, Carry Trades, and Exchange Rate MovementsShah, A., Zeileis, A., Patnaik, I.: What is New Chinese Currency RegimeDeutsche Bank Research: The U.S. Balance of Payments: Wide-spread Misconceptions and Exaggerated WorriesThe Group of 31 Report: Core Principles for Managing Multinational FX RiskCOURSE FORMATThe course combines lectures, exercises and discussions on actual problems. COURSE ASSESSMENT Students will be graded on the basis of: class attendance (20%), solving the series of mini cases during the term (15 %), presentation of the project (35 %), written exam (30 %). Final grade depends on total number of percents (see bellow):A (excellent) = 90 - 100 %B (very good) = 75 - 89 %C (good) = 60 - 74 %F (fail) = 59 % and lessPROJECT The presentation of the project is the crucial part of the course grade. The participants of the course are expected to form the teams that consist of three, four or five students and that will work on the project. The project is oriented on discussion of special subjects related to international finance such as: evaluation techniques for currency derivatives, special type of currency derivatives, hedging strategy in foreign exchange market, fundamental or technical analysis of exchange rate movements, exchange rate prediction, risk in market maker’s foreign exchange transactions, managing exchange rate risk in global oriented firm, analysis of balance of payments of selected country etc. Students are expected to actively seek for and find the subject of the project depending on their knowledge and preferences.The project should take the form of extended essay (10-20 pages), should be problem oriented and should be based not only on the textbooks but also on new sources of information that can be found in the last published research papers, books or on www pages. The final presentation should in short review main topic of the project and discuss in detail the project’s results and conclusions. It’s expected that the presentation will take about 10-15 minutes and all members of the team will be prepared to react on the questions of the auditorium after the presentation.EXAMThe final written exam consists of 10 multiply choice questions + 3 short exercises. All the questions and exercises are based on class lectures, class handouts and literature.COURSE SCHEDULE AND CONTENT1.-2. Foreign Exchange MarketsGeographical extent Trading systems Market participants Type of FX transactions FX rates quotation Motivation (Arbitrage, Speculation, Hedging)Cross ratesEiteman, D. K., Stonehill, A. I., Moffeit, M. H.: Multinational Business Finance, 8th Edition, Addison Wesley, 1999, chapter 4http://www.financetrainer.com/Portals/2/Formel-Service/tcs0101_e.pdf3.-4. Outright Forwards and FX SwapsMain features of forward contractForward rates and swap points calculation and quotationInterest rate parity and covered interest rate arbitrageForward contract and hedgingMain features of FX swapsMain type of FX swapsShapiro A. C.: Multinational Financial Management, 6th Edition, Prentice Hall, 1999, chapter 5.3-4http://www.financetrainer.com/Portals/2/Formel-Service/tcs0102_e.pdf5. Currency Swaps Main features of currency swaps Fixed-to-fixed swaps, fixed-to-float swaps and float-to-float swaps Currency swaps price quotation and calculation Example on hedging and financing using currency swaps Eiteman, D. K., Stonehill, A. I., Moffeit, M. H.: Multinational Business Finance, 8th Edition, Addison Wesley, 1999, chapterhttp://www.financetrainer.com/Portals/2/Formel-Service/tcs0304_e.pdf6. Foreign Currency Futures Main features of currency futures contractForward contract vs. currency futures contractFutures price quotation and calculationCurrency futures contract and hedgingShapiro A. C.: Multinational Financial Management, 6th Edition, Prentice Hall, 1999, chapter 6.17. Foreign Currency Options Main features of currency option contract Currency option exercise price and premium Currency option quotation Profit and loss positions Currency options and hedgingEiteman, D. K., Stonehill, A. I., Moffeit, M. H.: Multinational Business Finance, 8th Edition, Addison Wesley, 1999, chapter 6 http://www.financetrainer.com/Portals/2/Formel-Service/tcs0103_e.pdf8. Theory of Exchange Rate Determination and International Parity Conditions Prices, interest rates and FX rates Purchasing power parity International Fisher effect Interest rate parityEiteman, D. K., Stonehill, A. I., Moffeit, M. H.: Multinational Business Finance, 8th Edition, Addison Wesley, 1999, chapter 59. International Monetary System and Foreign Exchange Rate PolicyFixed vs. flexible exchange rate regimes History of international monetary system Project of European Monetary Union Shapiro A. C.: Multinational Financial Management, 6th Edition, Prentice Hall, 1999, chapter 310. Balance of Payments Balance of payments statement Foreign transaction in balance of payments Balance of payments structure Current account balance, financial account balance and changes in official reservesEiteman, D. K., Stonehill, A. I., Moffeit, M. H.: Multinational Business Finance, 8th Edition, Addison Wesley, 1999, chapter 311. Managing Foreign Exchange Exposure and RiskTypes of foreign exchange exposure Transaction exposureOperating (economic) exposure Managing foreign exchange exposure and riskEiteman, D. K., Stonehill, A. I., Moffeit, M. H.: Multinational Business Finance, 8th Edition, Addison Wesley, 1999, chapter 7 and 812. Presentations of Project13. Exam
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