UNIVERSITY OF LETHBRIDGE FACULTY OF MANAGEMENT Finance Area Lethbridge, AB, T1K 3M4

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1 UNIVERSITY OF LETHBRIDGE FACULTY OF MANAGEMENT Finance Area Lethbridge, AB, T1K 3M4 (January 7, 2009) MGT 3460B GLOBAL FINANCIAL MANAGEMENT SPRING 2009 Tuesdays and Thursdays 15:05 16:20 in AH176 Prof. Cornelis A. Los, PhD Office hours: Tuesdays and Thursdays, 16:30-17:30, after class Office: University of Lethbridge, E441, 4401 University Drive, Lethbridge, AB, Canada T1K 3M4 Tel: (403) URL: Abstract The scope and content of international finance have been fast evolving, due to the deregulation of financial markets, product innovations, and technological advancements. As capital markets of the world have become more integrated via trade-financing and inter-bank swaps, a solid understanding of international finance has become essential for astute corporate decision making. This course emphasizes the basics of international business finance, while keeping a managerial perspective. First, we discuss the fundamental concepts of international finance, so that the students will acquire a framework for analysis, like international trade based on comparative advantage with compensating capital flows within the international monetary system, accounted for by the balance of payments. Such a framework will serve students well when they need to apply this material in their future business careers. Second, we always keep in mind that it is the fundamental job of the financial manager to maximize shareholder wealth. Thus, we look at the functions, opportunities and risks of the world financial bond, equity and derivatives - markets and institutions, with a special focus both on foreign exchange exposure and management and on foreign direct investments and cross-border acquisitions. All this is discussed from the micro perspective of the financial management of the multinational firm and the macro perspective of the inexorable process of globalization, which currently is experiencing some severe adjustments and possible setbacks. Prerequisites Although there are no strict prerequisites for this course, completion of MGT3412 (Fundamentals of Investments) or MGT3470 (Corporate Finance) is highly recommended. Proposed Lecture Schedule CLASSES TOPICS TUESDAYS & THURSDAYS 12:15 13:30 Week 1 Jan 8 0. INTRODUCTION TO CPS ASSIGNED READINGS ERB: Chapter 1 Week 2 Jan 13 & GLOBALIZATION, INTERNATIONAL FIRMS A: goals of international financial management 2. INTERNATIONAL MONETARY SYSTEM: its evolution and fixed versus flexible exchange rate regimes; emergence of Euroland, SE Asia, China and India ERB: Chapter 2 Article: Los, 2000

2 Week 3 Jan 20 & 22 Week 4 Jan 27 & 29 Week 5 Feb 3 & 5 Week 6 Feb 10 & 12 Week 7 Feb 17 & 19 Week 8 Feb 24 Feb 26 Week 9 Mar 3 & 5 Week 10 Mar 10 & 12 Week 11 Mar 17 & 19 Week 12 Mar 24 & BALANCE OF PAYMENTS: the case of Canada; possible balance of payments problems; the benefits and costs of a weak Canadian dollar 4. THE MARKET FOR FOREIGN EXCHANGE: spot and forward FOREX 5. INTERNATIONAL PARITY RELATIONSHIPS: interest rate parity; purchasing power parity, Fisher effects; the parity diamond and short and long term arbitrage 6. INTERNATIONAL BANKING & MONEY MARKET: types of international banking services, capital adequacy standards; international money markets; international financial crises READING WEEK: No Class MIDTERM EXAM No class: Professor Los attends South-West Finance Association meetings in Oklahoma City, OK, USA, Feb 26-28, INTERNATIONAL BOND MARKET: foreign and Eurobonds and notes; international credit ratings; market structures 8. INTERNATIONAL EQUITY MARKETS: international equity benchmarks; trading international shares; factors affecting international returns, risks and liquidity 9. FUTURES AND OPTIONS ON FOREIGN EXCHANGE: currency futures relationships; Eurodollar interest rate futures; currency option relationships 10. INTEREST RATE AND CURRENCY SWAPS: the size and importance of the swap market; swap banks; interest rate and currency swaps; currency swap debt; credit default swaps;; efficiency and risks of swap markets; ERB: Chapter 3 ERB: Chapter 4 ERB: Chapter 5 ERB : Chapter 6 Covers material from weeks 1-6 ERB : Chapter 7 ERB: Chapter 8 ERB : Chapter 9 Article: Schap & Acworth, 2004 ERB: Chapter 10 Week 13 Mar 31 & Apr INTERNATIONAL PORTFOLIO INVESTMENT: ERB: Chapter 11

3 Week 14 Apr 7 & 9 portfolio arithmetic; optimal international portfolio selection; international mutual funds; country funds; ADRs; solving the optimal international portfolio with cash accounting identities 12. MANAGEMENT OF ECONOMIC AND TRANSACTION EXPOSURES: three types of exposures; management of operating exposure Articles: Los, 1998 & 2002 ERB: Chapters 12 &13 Week 15 Apr 14 & MANAGEMENT OF TRANSLATION EXPOSURE: forward and option hedges; cross-currency hedging; hedging with swaps; exposure netting; should a firm hedge? ERB: Chapter 14 Week 16 Apr 21 or 23 FINAL EXAM Covers material from weeks 9-16 Required Readings Students are strongly advised to start reading the required literature immediately, so as not to fall behind with their exam preparations and to enable themselves to speedily become productive employees of their respective asset management firms. The basis textbooks for this course are, first the comprehensive, trusted and widely used textbook by Professors Cheol Eun of the DuPree College at the Georgia Institute of Technology, who serves as a consultant to the World Bank and the Korean Development Institute, advising on capital markets liberalization, global capital and exchange risk management, which is one of my own areas of professional expertise ; Professor Bruce Resnick of the Babcock Graduate School of Management at Wake Forest University, who, like me, is interested in research on the efficiency of options and futures markets and empirical tests of asset pricing. He currently focuses on the optimal design of internationally diversified portfolios controlled for parameter uncertainty and exchange rate risk, about which I ve published the following articles (1 & 2); and Professor Donald Bean of the Rotman School of Management at the University of Toronto, who advises the Canadian Federal Department of Finance, the UN Development Program, the World Bank and the International Monetary Fund (IMF) and is also interested in international financial risk management. [ERB] Cheol S. Eun, Bruce G. Resnick, and Donald J. S. Bean International Financial Management: Canadian Perspectives, 5th ed., McGraw-Hill, Boston, 2008, (ISBN: ). In addition there are a few required articles 1. Cornelis A. Los (2000) "Euro's Impact on the Financial Markets: Is Euroland an Optimum Currency Area?," Chapter 10 in Williams, John J., John F. Webster, and Alfred E. Seaman (Eds.), European Union: Global Challenges and Opportunities for Business, Nanyang Business Report Series, Prentice Hall, Singapore, 2000, pp Cornelis A. Los (1998) Optimal Multi-Currency Investment Strategies with Exact Attribution in Three Asian Countries, Journal of Multinational Financial Management, 8, 2-3, September, [On July 22, 1998, this paper received an Outstanding Paper Award from The Asia-Pacific Risk and Insurance Association in Singapore]. 3. Cornelis A. Los (2002) Optimal Asian Multi-Currency Strategy Portfolios With Exact Risk Attribution, in Batten, Jonathan A., and Thomas A. Fetherstone (Eds.), Financial Risk and Financial Risk Management, Research in International Business and Finance, Vol. 16, JAI Press, Inc. Elsevier Science, Amsterdam, The Netherlands, pp [This volume was chosen by Elsevier as Book of the Month in 2003].

4 4. Schap, Keith, and Will Acworth (2004) Plugging Into Forex Markets, Futures Industry, May/June, Students are expected to read the assigned readings before each class meeting. Regular reading of The Wall Street Journal is required. Regular reading of the Financial Times, The Economist and the Far Eastern Economic Review, to gain background information on the global financial markets and the management of global financial firms is highly recommended. The Wall Street Journal: (required) The Economist: (highly recommended) Far Eastern Economic Review: (highly recommended) Required Class Participation System (CPS): Students need to acquire the electronic CPS response pad at the University of Lethbridge bookstore. In November the on-campus bookstore has been instructed to order these response pads together with the textbooks. You need three key codes to properly register with the CPS. First, your Class Key is H46658G617. Second, you need the Serial Number from the back of the response pad you purchase at the bookstore. Third, you need the Enrollment Code from the yellow card packaged in the back of the textbook or a credit card. This CPS registration process will be explained on the first day in class. Recommended Texts (not required): 1. James Baker, International Finance, Pearson Higher Education, 1998, 560 pages (ISBN: ). 2. Adrian Buckley, Multinational Finance, Prentice Hall, 3 rd ed., 1996, 612 pages (ISBN: ). 3. David K. Eiteman, Arthus I. Stonehill, and Michael H. Moffett, Multinational Business Finance, 10 th ed., Pearson/Addison Wesley, 2004, 772 pages (ISBN: ). 4. Mandelbrot, Benoit B., and Richard L. Hudson, The (Mis-) Behavior of Markets: A Fractal View of Risk, Ruin, and Reward, Basic Books, New York, 2004, 328 pages (ISBN: ). 5. Michael Melvin, International Money & Finance, 7 th ed., Pearson/Addison Wesley, 2003, 288 pages (ISBN: ). 6. Michael H. Moffett, Arthur I. Stonehill, and David K. E. Eiteman, Fundamentals of Multinational Finance, Pearson/Addison Wesley, 2003, 556 pages (ISBN: ). 7. Jeff Madura, International Financial Management, 7 th ed., South-Western College Publishers, 2002, 704 pages (ISBN: X). 8. Alan C. Shapiro, Multinational Financial Management, 7 th ed., Wiley, 2002, 768 pages (ISBN: ). Recommended Web Resources This textbook has its own Online Learning Center: This site contains study tools, such as flashcards and quizzes. This site also includes the International Finance Software that can be used in conjunction with this book. You may want to try this software out on some of the end-of-chapter problems in the textbook (marked with an Excel icon) to acquire very marketable skills. This Excel software has three main programs: - A currency options pricing program, which allows you to price call and put options on foreign exchange. - A hedging program which allows you to compare forward money market instruments, futures, and options for hedging exchange risk. - A portfolio optimization program based on the Markowitz Mean - Variance model, which allows you to examine the benefits of international portfolio diversification. Method of Instruction: Lectures (2 x 75 min): 150 minutes per week

5 This is an intensive course, which requires professionalism and initiative - taking from the students. The students are strongly recommended to read the assigned readings at least once before the corresponding class, to practice assigned homework (not graded), to prowl the assigned electronic web sites, and to be prepared to answer a few readings and assigned homework related quiz questions in the immediately subsequent classes. Specific Course Policies: Class attendance is required and will be recorded (by the CPS or by hand). Class absence must be documented by authorized and signed medical certificates, signed letters, etc. Weekly random short in-class quizzes, to give you competitive feedback on how you absorb the required materials so as to pas the Midterm and Final Exams are a feature of this course. Grading Grading practice and scaling will adhere to school policy. A+ = C+ = A = C = A- = C- = B+ = D+ = B = D = B- = Less than 50 = Solid F (no plus or minus) Grades will be determined on student performance throughout the semester and are not subject to negotiation during or at the end of the semester. There will be no substitute or make-up exams, unless there is a very legitimate and documented reason (severe illness, evidenced by a physician s report. The flu isn t enough!). Student grades will be determined using the following weights: Short Quizzes 30% Mid-term Exam (in week 8) 35% Final Exam (in week 16) 35% 100% University Policies Applicable to all Students in this Course: Plagiarism and Cheating (with thanks to Dr. Chris Holsworth, Geoffrey Kneller and Dr. Kelly Williams. I was a member of the Committee on Plagiarism and Cheating at the Nanyang Technological University in Singapore, so I take this VERY seriously) Plagiarism is defined as to steal and pass off the ideas and words of another as one s own (Webster s Dictionary). Plagiarism and cheating, e.g., on exams, will not be tolerated, will automatically result in a zero grade for the submission, and will be reported. Any student caught plagiarizing or cheating may also be subject to additional University sanctions. Special care should be taken to understand and avoid Academic Offenses of Plagiarism and Cheating listed in the Student Discipline Policy. For the current University Policy on Cheating and Plagiarism, please, consult pages of the University of Lethbridge calendar. The University of Lethbridge subscribes to a plagiarism detection service. Students may be required to submit their written work in electronic form for plagiarism checking. Make-up Exams Students who fail to write final exams must provide satisfactory evidence of illness or extenuating circumstances AND must have the approval of the Dean for a makeup exam. For missed exams, a grade of F (0 marks) will be given.