International Finance

As corporations and institutions conduct their businesses in an increasingly integrated world, the need to understand the behaviour of international financial markets becomes ever more apparent. In the first semester, this course focuses on the foreign exchange market and major approaches to analysing the determination of exchange rates and international asset prices. We also explore the links between exchange rates, macroeconomic activity, and a country’s international competitiveness through Purchasing Power Parity (PPP). To provide the necessary foundations, the course begins with a critical appraisal of the institutional features of foreign exchange markets. The international parity conditions are then considered in some detail. Following an analysis of purchasing power parity/real exchange rates and real interest rate parity, the semester concludes with a critical analysis of international portfolio diversification, international equity asset pricing models, and empirical evidence on Covered Interest Parity (CIP) and Uncovered Interest Parity (UIP).

In the second semester, the course unit focuses on the problems faced by firms operating within the international financial environment. Emphasis is placed on the impact of foreign exchange rate fluctuations on assets and liabilities denominated in foreign currencies, and on theoretical and empirical models of exposure measurement. The importance of international pricing, inflation risk, market efficiency, and country risk—along with their implications for managing and hedging financial risk—will also be considered. The process and nature of international capital budgeting and financial decision-making will also be studied.

BMAN23000(A) or BMAN23000(B) is a pre-requisite of BMAN 30060.

BMAN23000(A) or BMAN23000(B) Foundations of Finance (pass at 40% or above at the first attempt unless a higher percentage is indicated within this course outline. If the pre-requisite unit is defined as a compulsory course unit within your programme of study (Maths with Finance, IBFE, Accounting, BA Econ pathways for example) then progression onto the dependent unit is permitted as long as you have gained the appropriate amount of credit to progress on to the following year of your registered undergraduate programme.)

Familiarise students with:

• The institutional structure, the nature of trading procedures, and trading activity in foreign exchange (FOREX) markets.

• The international parity conditions: purchasing power parity, covered and uncovered interest rate parity, and real interest parity.

• Issues relating to the efficiency of foreign exchange markets and the forward bias puzzle.

• The pricing of international financial assets and their role in financing and investment decisions.

• The financial management problems faced by firms that operate within the international financial environment.

• The theoretical models of exposure measurement.

• The importance of international pricing strategy, inflation risk, market efficiency, and country risk in terms of their implications for managing and hedging financial risk.

• International asset pricing and portfolio diversification.

Overall, there will be 44 hours of lectures (22 hours per semester, including the revision lecture)

• Lectures: 2 hours per week over 22 weeks

The lectures will be on campus and a podcast of the lecture will be made available on Canvas.

• Online (optional) Workshops: 1 hours per week only in semester 1.

The workshops run in weeks from week 3, except for the reading week. At the end of each workshop week the solutions to the relevant practice question will be made available via Canvas.

Note: 6 Practice questions will be made available on Canvas on a regular basis in semester 1.

Explain how spot and forward foreign exchange markets operate and apply Covered Interest Parity (CIP), Uncovered Interest Parity (UIP), and Purchasing Power Parity (PPP) using relevant datasets or real-world examples.

Analyse exchange-rate and macroeconomic data to determine how macroeconomic activity influences international competitiveness through Purchasing Power Parity (PPP), using empirical evidence.

Describe pricing methods for international financial assets or data-driven illustrations of portfolio diversification principles.

Explain types of corporate exposure to exchange-rate movements and clarify their implications for firm value using applied examples.

Evaluate empirical studies on Covered Interest Parity (CIP), Uncovered Interest Parity (UIP), and market efficiency, identifying methodological strengths, limitations, and implications for financial decision-making.

Evaluate empirical evidence on return anomalies in international markets, using analysis and synthesis as appropriate to judge robustness and relevance.

Propose hedging strategies and financial instruments, using evaluation and justification as appropriate to select suitable tools for managing foreign-exchange exposure.

Apply asset pricing models in applied scenarios to determine whether new return-generating strategies can be developed over benchmarks.

Use quantitative techniques such as regression to analyse exchange-rate data and determine alignment with theoretical parity relationships.

Recommend hedging instruments for diverse situations, applying exposure-measurement frameworks and supporting proposals with quantitative evidence.

 

Communicate financial analysis and recommendations clearly to professional audiences.

Be able to exercise a capacity for independent and self-managed learning.

Semester 1: Examination (50%)
Semester 2: Examination (50%) 

 

Bekaert, G., and Hodrick, R., (2017), International Financial Management, 3rd edition, Cambridge.

Eun, C. & Resnick, B, and T. Chuluun (2023) International Financial Management, 10th edition, McGraw-Hill