A78609 International financial and foreign exchange markets

Scuola di Economia e Management
Syllabus
Academic Year 2018/19 Second Semester

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

Learning Objectives

The course aims at:

  1. Offering a closer insight into daily FX market functioning (trading, hedging, settlement…);
  2. Letting you discover the rationale and the historical evolution of the current worldwide financial infrastructure;
  3. Developing a stronger understanding of some of the most recent issues on worldwide financial markets (“Argentine Great Depression”, Lehman Brothers bankruptcy, Euro crisis…);
  4. Providing both a strong conceptual background and an in-depth practical overview of the main topics discussed throughout the course.

Learning targets

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

  1. to understand the complexity of the global financial system, together with 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 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 of foreign exchange markets and international portfolio diversification, as well as to gain an insight about many current crucial issues concerning international financial markets on a worldwide scale. 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 lying at the basis of today’s global markets.

A major focus will be on:

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

 

Course Delivery

The course aims at developing a sound conceptual and practical background for all the discussed topics: in order to achieve this task, all the lessons revolve around a continuous blend between the macroeconomics and the microeconomics of international financial markets, with a particular focus on FX market functioning and trading mechanisms.

Students are strongly incentivized to develop a clear 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 max) for all the students attending at least 80% of the classes

Syllabus

Session 1
Hours of lesson: 3
Instructor: G. Schlitzer

Topics:

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:

Material provided by the instructor

Session 2
Hours of lesson: 3
Instructor: A. Ziliotto

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 – CHIPS & CLS –, quoting conventions – American vs European quotation –, reciprocal and cross rates – triangular parity and triangular arbitrage conditions: theory and practical examples–)

Readings:

Selected textbook chapters

Session 3
Hours of lesson: 3
Instructor: A. Ziliotto

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:

Selected textbook chapters

Session 4
Hours of lesson: 3
Instructor: A. Ziliotto

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:

Selected textbook chapters

Session 5
Hours of lesson: 3
Instructor: A. Ziliotto

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:

Selected textbook chapters

Session 6
Hours of lesson: 3
Instructor: G. Schlitzer

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:

Material provided by the instructor

Session 7
Hours of lesson: 0
Instructor: A. Ziliotto

Topics:

FX parity conditions and their deviations – I part

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:

Selected textbook chapters

Session 8
Hours of lesson: 3
Instructor: A. Ziliotto

Topics:

FX parity conditions and their deviations – II part

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

Readings:

Selected textbook chapters

Session 9
Hours of lesson: 3
Instructor: A. Ziliotto

Topics:

The Balance of Payments (quick recap from a financial perspective) and the models of exchange rate determination – I part

The flow and the stock models

Readings:

Selected textbook chapters

Session 10
Hours of lesson: 3
Instructor: A. Ziliotto

Topics:

The Balance of Payments (quick recap from a financial perspective) and the models of exchange rate determination – II part

The flow and the stock models

Readings:

Selected textbook chapters

Session 11
Hours of lesson: 3
Instructor: A. Ziliotto

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:

Selected textbook chapters

Session 12
Hours of lesson: 3
Instructor: G. Schlitzer

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:

Material provided by the instructor

Session 13
Hours of lesson: 3
Instructor: A. Ziliotto

Topics:

Country Risk

Sources and sizes of the gains deriving from inter-country dealing

Readings:

Selected textbook chapters

Session 14
Hours of lesson: 3
Instructor: A. Ziliotto

Topics:

The art of exchange rate forecasting

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

Readings:

Selected textbook chapters

Session 15
Hours of lesson: 3
Instructor: G. Schlitzer

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:

Material provided by the instructor


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