Student guide Faculty of Economics A.Y. 2008/09

International Financial Markets
Aim of the course
Aim of the course is to offer an updated framework of the rapidly changing international financial markets with the specific purpose of understanding and analysing the new strategic and management approaches of banks and other financial intermediaries.
The course is structured in two main parts.
In the first part we deal with international banking strategy. In the first three lessons we review what a bank is, why it is special compared to other intermediaries and how it works, with particular reference to the treasury function and asset and liabilities management. Furthermore we deal the risk dimension of the banking activity and we introduce the concept of Var. In the fourth lesson we discuss regulatory capital and Basle 2. In Lesson 5 and 6 we discuss the structure of the banking market: one side we deal with differences between commercial and investment banking, and on the other we discuss international banking in its various forms. In the seventh lesson we build upon all the above concepts and discuss strategic implications for banks with particular reference to the current market and credit crisis.
In the second part, the goal is to provide the basic economic and financial tools for understanding the historical moments that we are living in and appreciating the debate that is rising around the working and the future of the International Monetary and Financial System. Financial markets are the expression of Globalisation and Internet is the medium through which Globalisation reaches everyone The textbook and the readings are all available on Internet.
Part I- Internatiional banking
a) Course synopsis
Lesson 1 – What is a bank? Basic concepts and peculiarities
  • The role of the financial system and intermediaries
  • The peculiarity of the bank compared to the other intermediaries
  • Products & services
  • Multinational and international banking
  • Banking systems and financial crisis
Lesson 2 – How banks work: fundamentals of asset and liability management
  • The Treasury function
  • Managing the bank’s loans and assets
  • Liability management and funding policy
Lesson 3 – Risks of banking activity and VAR
  • Types of risks
  • Quantitative measures of risk
  • VAR as a measure of downside risk
  • Introduction to interest rate and liquidity risks
Lesson 4 – Basel 2 and Regulatory Capital
•         1988  Agreement
•         1996 amendment and market risks
•         Basel 2
•         IAS 39 and accounting principles
•         Implications of the financial crisis: towards Basel 3?
Lesson 5 – Commercial Banks, Investment banks and financial markets: a changing environment
Markets vs. direct intermediation
The US experience: deposit taking institutions vs. Investment banks
The eclipse of the investment banks in the US
Universal banks
The European framework: the Second banking directive
Lesson 6 - From multinational to international banking. Why do banks go abroad?
  • Origins Multinational and International banks
  • Euromarkets and eurobanks
  • Key drivers and issues in modern international banking
Lesson 7 – Financial crisis and implications for the strategy of international banks
Key impact of the financial crisis on existing business models and strategy of the banks
What’ next? What type of bank for the future?

Part II- International Finance
a) Course synopsis
1.      International Finance and the Global Crisis
This session highlights the importance of the topics of International Finance in order to understand the World in which we live. The Global Crisis of 2007-2009 was born in the financial sector and spread to the entire economy because of the role that International financial institutions and capital markets are playing in a more and more interconnected world.
2.      Basic Concepts in Balance of Payments, Capital Flows and Global Imbalances
We define the basic concept behind the balance of payments accounts and how the interconnection between the current account and the financial account is established. We discuss the twin-deficit identity and a country's international investment position, using as an example the US-China relationship.
3. An Introduction to Capital Markets and their Financial Instruments
We will review the workings and methods of the capital markets and their instruments. We will focus primarily on foreign exchange markets, but we will review the most important derivatives contracts and relevant markets for determining capital flows among countries
4. Models for Exchange Rates’ Determination: Interest Parity and PPP
This session highlights the linkage between the exchange rate, and interest rates through the interest rate parity condition. It is shown how changes in economic variables can affect differential rates of returns, which in turn can affect the value of the exchange rate. This session presents the theory of purchasing power parity. The logic of the theory as an explanation for exchange rate movements is provided. More importantly, the supplemental readings help teach the way PPP exchange rates are used to make international comparisons of economic data.
5. Monetary Policy, Interest Rates and Exchange Rates: the Mundell-Fleming model
This session presents the basic model of interest rate determination and then links it with the interest rate parity model for exchange rate determination. This session introduces discusses long-run effects of monetary policy and central bank interventions in a floating system.
6. Monetary Policy, Interest Rates and Exchange Rates: policy with fixed and floating exchange rates
This session is the prosecution of the previous one. Fixed exchange rate systems are then  introduced in the basic macroeconomic model.
7. International Financial Markets and Global Stability
This session looks at current financial developments  and  focus on the issue of Global Stability. This session closes the course and should give an understanding of the sources and nature of the risks that international financial markets pose for the investors and the multinational companies

Reading list
References Part I

A. Saunders, M.M. Cornett, “Financial Institutions Management”.  MacGraw-Hill, 2006
J. De Haan, S. Oosterloo, D. Schoenmaker, “European Financial Markets and Institutions”, Cambridge University Press, 2009
Geoffrey Jones, “Multinational and International banking” 1992
Herbert G. Grubel (1977), “A Theory of Multinational banking”, Banca Nazionale del Lavoro Quarterly Review, 123, December
Robert Z. Aliber (1984), “International banking: A Survey”, Journal of Money, Credit and Banking, XVI (4) Part 2 
G. Dufey and I. Giddy, “The International Money Markets”. Prentice-Hall, 1978
  • “State of the Financial Services Industry 2009”, Oliver Wyman,  January 2009
  • “The Future of  Global Financial System”, World Economic Forum & Oliver Wyman,  January 2009
  • Paradise Lost. A Special report on International Banking”, The Economist, May 17, 2008
  • Ireland bails out its 2 biggest banks”, M. Saltmarsh and e. Quinn, International Herald Tribune,  February 12, 2009
  • “Did Crisis avoidance create one?”, Joe Nocera, International Herald Tribune
  •  “ UniCredit to write down €1bn”, By Adrian Michaels, Financial Tomes, April 24 2008
  •  “We will never have a perfect model of risk”, Alan Greenspan, Financial Times, March 17 march 2008)
“Revision to the Basel II market risk framework”, Basel Committee on Banking Supervision, January 2009
“Report of the Financial Stability Forum on Enhancing Market and Institutional Resilience” Financial Stability Forum, April 2008

References Part II

ü       S. Suranovic, “International Finance Theory and Policy”,

Institutional websites