A78609 International financial and foreign exchange markets

Scuola di Economia e Management
Syllabus
Academic Year 2013/14 Second Semester

foto
Docente TitolareGiuseppe Schlitzer
E-mailgschlitzer@liuc.it
Office"Torre" (main tower), 7th floor
Phone

Learning Objectives

At the end of the course the students will be able:

  1. to better understand the complexity of the global financial system, its risks and opportunities;
  2. to evaluate in a critical way the soundness of national and international financial systems, resting on such elements as the Balance of Payments, the major policies applied to the international flows of goods, services and capitals, the adopted exchange rate regimes and the monetary policy decisions implemented by the Central Banks.
  3. to master the mechanics of Forex trading as well as of foreign exchange rate markets;
  4. to build simple internationally-diversified portfolios;
  5. to assess the risks arising from international investments with the aim of selecting the most suitable hedging procedure(s).

Learning targets

At the end of the course the students will be able:

  1. to better understand the complexity of the global financial system, its risks and opportunities;
  2. to evaluate in a critical way the soundness of national and international financial systems, resting on such elements as the Balance of Payments, the major policies applied to the international flows of goods, services and capitals, the adopted exchange rate regimes and the monetary policy decisions implemented by the Central Banks.
  3. to master the mechanics of Forex trading as well as of foreign exchange rate markets;
  4. to build simple internationally-diversified portfolios;
  5. to assess the risks arising from international investments with the aim of selecting the most suitable hedging procedure(s).

Course Content

International financial markets are a powerful engine of both growth and disaster for the global economy. They facilitate the transmission of positive and negative economic shocks among nations and pose challenges and opportunities to firms and investors.

Aim of the course is to let you master the functioning and the economic rationale behind foreign exchange markets and international portfolio diversification, as well as to gain an insight about many current crucial issues concerning the international financial markets and their impact on the worldwide economy. Attention will be paid to the historical evolution of the international financial infrastructure, as a necessary prerequisite to develop a stronger understanding of the complex dynamics underlying the current global markets.

A major focus will be on:

  1. FX markets’ functioning;
  2. Exchange rate parity conditions and exchange rate determination;
  3. Exchange rate risk management;
  4. FX markets efficiency and exchange rate predictability;
  5. Diversified international investments

Course Delivery

The course aims at developing a sound conceptual background together with a strong focus on everyday FX market practice. In order to achieve this task, the course revolves around a continuous blend between the macroeconomics and the microeconomics of international financial markets, while shedding light on daily FX market functioning and trading mechanisms.

Students are strongly incentivized to develop a clearer understanding of the theoretical framework dealt with in class through extensive examples and practical exercises. Even though not strictly required, a sound background in International Economics is warmly recommended. Some preliminary knowledge of Market Finance and major derivative products would also be of great help.

The website of the course on “my.liuc.it” must be consulted on a regular basis to check for updates, additional material and slides about the course. No excuse accepted for any failure during the course you may incur into due to a delayed consultation of the website.

Course Evaluation

For all the students, grade is based on a closed book exam at the end of the course. If so desired, the final grade may be revised (upwards/downwards) by sitting an additional oral examination right before the exam’s registration.

The whole course is structured to reward students for being proactive learners, so that the final grade will be further marked up (3 points) for all the students attending at least 80% of the classes.

Syllabus

Session 1
Hours of lesson: 3
Instructor:

Topics:

Overview of the course

International finance - An introduction

A look at the main players and issues in international finance (institutional investors, central banks and regulators, rating agencies, Bretton Woods Institutions, stock and foreign exchange markets, etc.)

Readings:

None

Session 2
Hours of lesson: 3
Instructor:

Topics:

International finance and the global economy

The growing importance of international financial flows with a focus on spot FX markets (main players – direct interbank market vs indirect brokerage market –, settlement – CLS –, quoting conventions – American vs European quotation –, reciprocal and cross rates – triangular parity and triangular arbitrage conditions: theory and practical examples–)

Readings:

Textbook chapters: I, II

Session 3
Hours of lesson: 3
Instructor:

Topics:

FX markets: between theory and daily practice

A deeper focus on FX market dynamics (a further insight into quoting conventions: the bid-ask spread – practical examples –). An introduction to the forward FX market: technical features, quoting conventions and payoff profile

 

 

Readings:

Textbook chapters: II, III

Session 4
Hours of lesson: 3
Instructor:

Topics:

The relationship between spot, forward and money market rates

The CIRP and its deviations: theory and practical examples (including bid-ask spread, transaction costs, etc.). How to construct synthetic securities using spot and forward contracts with borrowing and lending (I part)

 

Readings:

Textbook chapter: VI

Session 5
Hours of lesson: 3
Instructor:

Topics:

Currency futures and options

Technical features, quoting conventions and payoff profiles. Currency forwards vs currency futures (settlement and marking-to-market risks). Different instruments for different needs: what are forwards, futures and options used for? Constructing synthetic instruments (II part)

 

Readings:

Textbook chapter: IV

Session 6
Hours of lesson: 3
Instructor:

Topics:

International finance and the macroeconomics of the Balance of Payments (BoP)

Elements of BoP accounting and international reserves management under the different exchange rate regimes. Delving with financial crisis: has the BoP any role to play?

Readings:

Handouts provided by the lecturer

Session 7
Hours of lesson: 3
Instructor:

Topics:

FX parity conditions and their deviations – I

The Law of One Price, the PPP (Absolute and Relative versions) and the concept of real exchange rate (theory and practical examples). The CIRP, the UIRP (together with the related Fisher effect) and the Forward Rate Unbiased (both theory and examples)

Readings:

Textbook chapters: V, VI

Session 8
Hours of lesson: 3
Instructor:

Topics:

FX parity conditions and their deviations – II

Do the PPP and the IRPs hold in practice? Delving into the available empirical evidence

Readings:

Textbook chapters: V, VI

Session 9
Hours of lesson: 3
Instructor:

Topics:

The Balance of Payments (financial perspective) and the models of exchange rate determination – I

The flow and the stock models

Readings:

Textbook chapters: VII, VIII, IX

Session 10
Hours of lesson: 3
Instructor:

Topics:

The infrastructure of international finance: historical evolution and current situation

A brief history of international finance from the gold standard to the recent financial crisis. The role of the IMF and the debate about fixed vs flexible exchange rates.

Readings:

Handouts provided by the lecturer

Session 11
Hours of lesson: 3
Instructor:

Topics:

The Balance of Payments (financial perspective) and the models of exchange rate determination – II

The flow and the stock models

Readings:

Textbook chapters: VII, VIII, IX

Session 12
Hours of lesson: 3
Instructor:

Topics:

Working within an international context: arising risks and available mechanisms for hedge

The difference between risk and exposure. How to compute exposures and to evaluate risks, with a major focus on FX risk, country risk and operational risk (theory and practice)

Readings:

Textbook chapters: XIII, XIV, XV

Session 13
Hours of lesson: 3
Instructor:

Topics:

FX market efficiency and the art of exchange rate forecasting

Theoretical overview and available empirical evidence: could there be profitable trading strategies?

Readings:

Textbook chapter: XVI

Session 14
Hours of lesson: 3
Instructor:

Topics:

Portfolio Investment

Sources and sizes of the gains from diversified international portfolios

Review

 

Readings:

Textbook chapter: XVIII

Session 15
Hours of lesson: 3
Instructor:

Topics:

The current economic and financial crisis

How the current economic and financial crisis originated and developed. From subprime loans to the (possible) fall of the Euro: presentation and debate

Readings:

Handouts provided by the lecturer


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