International Finance (FBE 464)

Department of Finance Marshall School of Business University of Southern California

Spring 2007 Tel: 740-7558 email: baizhu@marshall.usc.edu http://www-rcf.usc.edu/~baizhu/ Office Hours: M 4:00 6:00pm TTH 2:00 3:00pm or by appointment

Professor Baizhu Chen HOH701C

This course will focus on decision making in an international context. It covers major topics in international financial markets. These topics are necessary materials to be learnt by anyone who is interested in pursuing a career in international investment, international banking, international trade or multinational corporations. In this course, we will discuss the foreign exchange markets. In particular, we will cover the spot exchange rate, forward exchange rate, currency futures and options. We will discuss the roles of these different instruments in risk management. Balance of payments and international monetary system are also topics to be discussed. We will also discuss the purchasing power parity and interest rate parity, the two parity conditions that are the foundations for international finance. COURSE REQUIREMENTS: Alan Shapiro, Multinational Financial Management, 8th edition, John Wiley & Sons, 2006 Reading Packet: The reader contains articles and cases for class discussion Wall Street Journal is required: I encourage you to bring to classes any relevant issues in the Wall Street Journal or other magazines for discussion. This will enrich our knowledge and experience. It also helps to bridge the gap between the theories and real world issues. Lecture notes will be posted in the BLACKBOARD system under the course number for downloading. You should be able to access the BLACKBOARD by typing your userid and password of your UNIX account. For more information of the BLACKBOARD, please contact the Keck Center. COURSE EVALUATION: Requirements for the course include three group projects (20%), Statistics Review Assignment (5%), two examinations (45%), five homework assignments (total 15%) and class participation (15%). Class participation may alter your grade by as much as one level. The final grade is based on a curve. I adhere roughly to the school guidelines: An average grade of 3.15 out of 4.00 for undergraduate elective courses. This translates loosely into something like 30-35% A, 45-50% B, 15-20% C, and 0-10% D&E. I do not assign letter grades to individual exams and homework assignments. However, I will give you complete distributions for each grade and you can apply the scale indicated above.

Group Project (3) Midterm Exam Final Exam Homework (5) Statistics Review Assignment Class Participation

20% 20% 25% 15% 5% 15%

Examinations will consist of multiple choice questions, numerical problems, and in some cases short essays. All exams are closed-book, closed-notes. Each exam will cover the required readings from the text and all the material covered in class. Each student has an option to drop the midterm examination score, and shift the entire midterm weight to the final examination. Homework: Each student is responsible for turning in her or his homework at the beginning of class on the due dates. Should he or she for any reasons turn in the homework assignment after the due dates, his or her scores will be discounted 10% for every hour the homework is overdue up to a maximum of 50% discount. You get full credit for an honest effort in doing the homework and turning it in on time; you will not be graded on the accuracy of your answers. I will hand out answers when I return the homework. I encourage you to work on the homework problems with your classmates or your team. However, each student must submit his or her own homework! Group Projects: Students must form teams of 3 - 5 for these assignments. Students who do not have a team will be assigned teams in class. Teams are asked to submit one report per project. Statistics Review Assignment is not to be graded. It is an individual assignment. You get full credit for an honest effort in doing this assignment and turning it in on time. Divorce Laws: A very important skill in the business world is the ability to work with other people in order to accomplish a given task, and to function effectively even if you don't like the other team members. There are invariably conflicts of personality, conflicts of motives, or conflicts of schedules in a team. The first step is to recognize that there is a difficulty and try to resolve it within the team promptly. The working definition of "promptly" is: Before the first team project is due. Occasionally it is not possible to resolve conflicts satisfactorily in this relatively short time period. In those cases, I urge you to come to me as early as possible. I will keep your difficulties confidential and I will try to change the team arrangements without penalizing or embarrassing anyone! No one should have to remain in a disfunctional team! Remember that the later you get a divorce the fewer your options are going to be. I am not planning to use Peer Evaluations to determine if everyone has contributed equitably. If a team does not seek a divorce I assume that all the team members are contributing equitably to the work. Violations of academic integrity standards will be treated seriously. "The use of unauthorized materials, communication with fellow students during an examination, attempting to benefit from the work of another student, and similar behavior that defeats the intent of an examination or other class work is unacceptable to the University. It is often difficult to distinguish between a culpable act and inadvertent behavior resulting from the nervous tensions that accompany examinations. Where a clear violation has occurred, however, the instructor may disqualify the student's work as unacceptable and assign a failing mark on the paper." Make-up Exams: Current department policy to which I adhere is No makeup midterm and final exams will be allowed. If you have an extenuating circumstance that prevents you from taking the exams, discuss your reasons with me BEFORE the time of the exam. Current department policy is that a student may not be given a make-up exam unless he or she has obtained written permission from the course instructor in advance. In addition, you must be able to document your extenuating circumstance.

Any student requesting academic accommodations based on a disability is required to register with Disability Services and Programs (DSP) each semester. A letter of verification for approved accommodations can be obtained from DSP. Please be sure the letter is delivered to me (or my TA) as early in the semester as possible. DSP is located in STU 301 and is open 8:30 a.m. - 5:00 p.m. Monday through Friday. The phone number for DSP is (213) 740-0776 This is a contract for this course between you and me. If you want a grade from this class, implicitly you have to follow this contract.

SCHEDULE
Date
Week 1: 1/8

Topic
Course Introduction. Get acquainted. Discussion of the case studies and reports. The Foreign Exchange Market ch. 7 Readings: Review of Statistical Tools

Assignment Due

Week 2: 1/15 Week 3: 1/22

NO CLASS The Foreign Exchange Market ch. 7 The Euromarkets ch. 13 A Yen For Risk, The Economist, May 11, 2006

MLK Holiday Statistics Review Assignment Due

Week 4: 1/29

Currency Futures and Options Markets ch. 8 Case: Lufthansa, Ivey Case 9B00N0022, 2000

Problem set #1 due.

Week 5: 2/5

Currency Futures and Options Markets ch. 8 Currency Swaps ch. 9

Project 1: Forward/Spot project due.

Week 6: 2/12

Balance of Payments ch. 5 Case: The U.S. Current Account Deficit, HBS 5-706-008 "The price of privilege", The Economist, September 22, 2005 Anatomy of thrift, The Economist, September 22, 2005 The global saving glut and the U.S. current account deficit, April 14, Remark by Ben Bernanke

Problem set #2 due.

Week 7: 2/19 Week 8: 2/26 Week 9: 3/5

NO CLASS Balance of Payments ch. 5 Review Midterm.

Presidents Day Problem set #3 due.

Date
Week 10: 3/12 Week 11: 3/19 NO CLASS

Topic

Assignment Due
Spring Break

The Determination of Exchange Rates - ch. 2 Case: China To Float or Not to Float (A)? A Sinking Feeling, The Economist, Jan. 5, 2006 As Fight Heats up Over China Trade, Business is Split, The Wall Street Journal, September 4, 2003 Ups and downs, The Economist, August 17, 2006

Week 12: 3/26

Parity Conditions in International Finance and Currency Forecasting - ch. 4 Mc Currencies, The Economist, May 25, 2006 Instant Returns, The Economist, October 5, 2006 Yen and Yang, the Economist, Sept. 28, 2006

Project 2: Forex Properties project due.

Week 13: 4/2

Parity Conditions in International Finance and Currency Problem set #4 due. Forecasting - ch. 4

Week 14: 4/9

The International Monetary System ch. 3 Markets to the Rescue, The Wall Street Journal, October 13, 1998 The Dollars World: Adios, Peso? The Wall Street Journal, Robert Barro, August 15, 2001 Whats in a Peg? The Economist, October 31, 2002 Not Even a Cat to rescue, the Economist, April 20, 2006

Project 3: IRPT project due.

Week 15: 4/16

Country Risk Analysis - ch. 6 International Portfolio Investment ch. 15 Case: China To Float or Not to Float (D)? Who wants to be a trillionaire? the Economist, Oct. 26,

Problem set #5 due..

2006 Week 16: 4/23 Review, catch up

Week 17: 4/30

Final Exam

7:00 - 9:00 pm.