Finance 376: International Finance Fall 2003
02560: TuTh 11:00am:12:30pm CBA 4.332
02565: TuTh 12:30pm:2:00pm CBA 4.332
Overview of the Course
Instructor: Dr. Robert C. Duvic
Office: Department of Finance, CBA 3.250
Office Hours: Monday, Tuesday, Wednesday, Thursday, Friday 10:00-11:00am and by appointment.
Phone Number: 471-6026
E-mail: duvicr@mail.utexas.edu
Teaching Assistant: TBA
Office Hours: TBA
E-mail : TBA
Textbook: Cheol Eun and Bruce Resnick, International Financial Management, Third Edition, The McGraw-
Hill Companies.
Course Description: Finance 376 examines the foreign exchange markets and how they shape the environment
within which corporate wealth-maximizing decisions are made. The course is designed for upper-division
undergraduate students who have a good understanding of basic economics, corporate finance and asset valuation.
Course Objective: This course has two primary objectives.
First: To develop a market-based understanding of exchange rates and show how exchange rate volatility
affects corporate decision-making. Four major areas will be covered.
• The International Environment
• The Foreign Exchange Derivative Markets
• What Factors Affect Exchange Rates
• Foreign Exchange Exposure and the Firm
Second: To develop a general understanding of market functioning. The course will not only develop the
institutional and quantitative details of markets, but also introduce a “financial” way of thinking about costs and
risks.
A Cooperative Effort:
I hope that this course will be an important element of your education. I am most interested in your
thoughts and how you are developing in the course and welcome your comments as the course progresses--with
your feedback the course will be a better career-developmental experience for you and your fellow students.
Also, if at any time what is expected of you is unclear, if you are having problems with specific assignments, or
have other difficulties with the course please see me.
Prerequisites:
I assume that you have a comprehensive understanding of valuation theory and corporate financial
decision-making from Finance 357 and an understanding of the basic economic concepts as covered in Eco 302
and 303.
You are required to have a "C" or better in Fin 357.
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Course Evaluation
The evaluation consists of three tests plus instructor evaluation.
Three Tests:
Purpose: The three tests in the course focus on selected major areas of international finance. The tests
form the major part of your evaluation and allow both me and you to evaluate your progress in the course. This
on-going feedback is crucial for your success in the course. Each part of the course builds on what has gone
before. For example, if you do poorly in the first, test, you probably will not have the foundation to do well on
the second test.
Value: The tests comprise 95% of the course grade. The points for each test are: Test 1 25%; Test 2 30%;
Test 3 (during final exam period) 40%.
Procedures: Appendix B of this syllabus discusses these tests.
Instructor’s Evaluation:
Purpose: This is a means for me to look at you as more than just the sum of your scores, and to reward
substantial participation in the course.
Value: 5% percent of final grade
Procedure: Appendix C of this syllabus discusses the instructor’s evaluation.
Grade Adjustments
Purpose: In the past a very few students have not cooperated with me in the administering of the course.
To minimize such occurrences, I may, at my discretion, penalize students by subtracting points from their grades
for certain occurrences. On the positive side, extra points will be awarded to students attending VIP speakers.
Procedures: Appendix C of this syllabus discusses these grade adjustments.
Course Policies and Procedures
Course Policies
The final test will be given during the final exam period and will be a consolidated test for both sections of
Fin 376. Therefore, the date and time in the Course Schedule is not valid. The correct scheduled date is Friday,
December 12, 7-10pm. This is the date and time that will appear in the formal Semester Test Schedule,
published in the latter part of the semester.
"Make-up or extra work" to improve your grade is not possible. Your final letter grade is determined
solely by your scores on the tests, other course work, and my evaluation of your class participation. In addition,
no special considerations concerning your general academic situation can be offered. The final grade in the
course, once assigned, will not be changed except in the event of a recording error.
Any individual suspected of cheating will be disciplined to the maximum extent possible. Storing
information other than formulae in a calculator used in a test is cheating.
If you do not attend a class it is entirely your responsibility to determine what you have missed, including
any administrative announcements I may have made.
Use of calculators in the course will be addressed in more detail in the lectures. However, from the outset,
it should be emphasized that the calculator cannot replace an understanding of the problem solving process.
Blackboard
We will use Blackboard, part of The University's e-University Initiative. Class materials are
available on this site. I will use this site throughout the course to give notices and other communications
with you. Password-protected class sites will be available for all accredited courses taught at The
University. Syllabi, handouts, assignments and other resources are types of information that may be
available within these sites. Site activities could include exchanging e-mail, engaging in class discussions
and chats, and exchanging files. In addition, class e-mail rosters will be a component of the sites. Students
who do not want their names included in these electronic class rosters must restrict their directory
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information in the Office of the Registrar, Main Building, Room 1. For information on restricting directory
information see: http://www.utexas.edu/student/registrar/catalogs/gi02-03/app/appc09.html.
Study Guidelines
You need to understand what you are studying, whether it is conceptual or analytical. Be an active student.
• Ask yourself such questions as:
i) What is the purpose of this concept or formula?
ii) Why is it important?
iii) How does the instructor or author demonstrate its importance?
iv) How does it "fit" with what you have studied so
• Rephrase the information in your own words. Develop your own examples. Form study
groups and discuss finance among yourselves.
You should reivew each chapter right before it is discussed in class. I will discuss the major elements of
the chapter and integrate it with other course material and other materials from other courses, but I do not have
the time to discuss everything you need to know. Read the chapter thoroughly after the topic is covered in class,
and then answer the verbal questions and quantitative problems, being sure to connect what these problems are
focusing on with what we discussed in class and what is contained in the chapter. If you are having trouble with a
concept/problem, see the TA or me as soon as possible.
The overhead transparencies and the class notes contain the important points in this course. Use them as a
guide for your studying efforts.
The questions and problems associated with each topic are not to be handed in; however, I encourage you
to thoroughly work through them. The test problems will appear simpler for those who work these questions.
Any amount of reading of the chapters will not help you consolidate the material if you don't work out the
problems. I will give more specific guidance concerning these problems as the semester progresses.
Supplemental Materials
Packet 1: Class Notes. These notes are the foundation of the course. They are aids in helping you
connect the various issues discussed in class and also allow you to focus on the class discussions.
Packet 2: Solutions to End-of-Chapter Questions. The solutions to all assigned end-of-chapter
questions and problems are provided to enable you to check your work.
Packet 3: Supplemental Questions. These are old exam questions that provide additional opportunities
for you to practice your skills. The first part of this section contains questions, the second part contains worked
out answers.
Supplemental Readings. I will pass out in class several readings that supplement the text materials.
Materials contained in Packets 1, 2 and 3 are available on the class site within Blackboard. They are also
available for purchase at the GSB copy center.
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Appendix A: Course Schedule
Fin 376: International Finance Fall 2003
Class Schedule
The dates in this schedule are approximate: the actual pace of the class will determine the speed of the course.
Part I: The International Environment
Dates Subject
Aug 28 Course Introduction
Sep 2 1. International Trade and Foreign Exchange
Reading: Eun & Resnick (ER): Chapter 1; Appendix A
Questions: ER Chapter 1: Questions 1 through 9
Problems: ER Appendix A: Problems 1, 2
Sep 4 2. International Monetary System
Sep 9 Reading: ER Chapter 2
Questions: ER Chapter 2: Questions 1 through 12
Sep 11 3. Balance of Payments:
Sep 16 Reading: ER Chapter 3
Sep 18 Question: ER Chapter 3: Question 1 through 12
Sep 23 Test 1 (Topics 1-3)
Part II: Introduction to Foreign Exchange Markets
Dates Subject
Sep 25 4. Spot Market
Sep 30 Reading: ER Chapter 4: pp. 74-91
Questions: ER Chapter 4: Questions 1, 2, 3, 4, 6, 8, 9
Problems: ER Chapter 4: 1, 7, 8
Supplemental Questions, Session 4: 1, 2, 3, 4, 5, 6, 7, 8
Oct 2 5. Forward Markets:
Reading: ER Chapter 4: pp. 91-96
Questions: ER Chapter 4: Questions 5, 7
Problems: ER Chapter 4: 2, 3, 4, 5, 6
Supplemental Questions, Session 5: 1, 2, 3, 4, 5
Part III: Forecasting Exchange Rates
Dates Subject
Oct 7 6. Interest Rate Parity
Reading: ER Chapter 5: pp. 100-108
Questions: ER Chapter 5: Question 1, 2
Problems: ER Chapter 5: 1 through 5
Supplemental Questions, Session 6: 1, 2, 3, 4
Oct 9 7. Purchasing Power Parity
Reading: ER Chapter 5: pp. 108-113
Questions: ER Chapter 5: Questions 4, 5
Supplemental Questions, Session 7: 1, 2
Problems: ER Chapter 5: Problem 6
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Oct 14 8. International Fisher Effect
Reading: ER Chapter 5: pp. 113-115
Questions: ER Chapter 5: 6
Oct 16 9. Forecasting Exchange Rates
Oct 21 Readings: ER Chapter 5: pp. 115-120
Questions: ER Chapter 5: 3, 7, 8
Oct 23 Test 2 Topics 4-9
Part IV: Derivative Markets
Dates Subject
Oct 28 11. Futures Markets
Oct 30 Readings: ER, Chapter 9: pp. 206-215
Questions: ER Chapter 9: 1, 2, 3, 4
Problems: ER Chapter 9: 1, 2, 3, 4, 5
Supplemental Questions: 1, 2
Nov 4 12. Options Markets
Nov 6 Readings: ER Chapter 9: pp. 215-223
Questions: ER Chapter 9: 5, 6, 7
Problems: ER Chapter 9: 7, 8
Supplemental Questions, Session 12: 1, 2, 3, 4
Nov 11 13. Swap Markets
Nov 13 Readings: ER Chapter 10
Questions: ER Chapter 10: 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11
Problems: ER Chapter 10: 1, 2, 3, 4, 5
Part V: Foreign Exchange Exposure and the Firm
Dates Subject
Nov 18 14. The Firm
Readings: ER Chapter 15
Questions: ER Chapter 15: 1 through 16
Nov 20 15. Economic Exposure
Nov 25 Readings: ER Chapter 12, pp. 290-292; 297-308
Questions: ER Chapter 12: 1 through 11
Nov 27 Thanksgiving
Dec 2 16. Transaction Exposure
Readings: ER Chapter 13
Questions: ER Chapter 13: 1 through 10
Problems: ER Chapter 13: 1, 2, 3, 4, 5, 6
Supplemental Questions, Session 16: 1, 2, 3, 4, 5
Dec 4 17. Operating Strategies
Readings: Same as Topic 16
Questions: Same as Topic 16
Problems: Same as Topic 16
Test 3: Friday, December 12, 7-10pm (Topics 11-16)
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Appendix B: Tests
Procedures:
There will be two in-class tests and one final test, as shown in the course schedule, Appendix A of this
syllabus. The final test will be given during the final exam period and will be a consolidated test for both sections
of Fin 376. Therefore, the date and time in the Course Schedule is not valid. The correct scheduled date is
Friday, December 12, 7-10pm. This is the date and time that will appear in the formal Semester Test Schedule,
published in the latter part of the semester.
A formula sheet for the course is contained in Appendix D of this syllabus. You will be provided a copy of
this formula sheet for each test, so you do not have to memorize formulas. However, several formulas that we use
have substantial economic logic that should be understood. We will examine those formulas as we progress
through the course.
In addition to the formula sheet, time value tables and scratch paper will be provided with your test. You
need only bring a couple of No. 2 pencils a hand calculator. Students taking each test must bring a picture ID to
the test sessions.
Test format:
The three tests consist of matching, fill-in-the-blank, short essay and quantitative problems. Samples of test
questions are included in this appendix.
• Fill-in-the-blank, matching: One of the basis requirements in learning any area of study is
mastering the terms and simple relationships that form the language of the discipline. The tests
use fill-in-the-blank and matching questions to ensure that you develop your understanding of the
terms used in international finance. These questions make up approximately 30% of each test.
• Short essay: There are several important economic relationships that influence exchange
rates, market activity and business profitability. The tests use short essays that require you to
explain a relationship, compare/contrast topics examined in the course or require you to apply
what you have learned to a business situation. This question makes up approximately 20% of
each test.
• Quantitative: Finance consists of logical relationships. Because managers’ final objective is
to create value measured in dollars, these financial relationships are quantified. However, finance
is not just plugging numbers into equations. You must understand what is going on in a specific
business or economic situation and what you what to do about it. Only then can you draw on the
quantitative relationships of finance to accomplish your goals. The test problems contain simple
situations that require you to identify a goal and use the quantitative relationships of the course to
obtain that goal. These problems make up approximately 50% of each test.
Grading:
The grade on each question is the result of the grader's evaluation of your answer based on the test key and
the general response of the class to the question. This evaluation will take into account not only the presence of
key terms but also the degree to which the student has demonstrated an understanding of the issues involved in
the question. The grade assigned is an informed and final evaluation, not the beginning offer in a bargaining
process. In many items partial credit will be awarded.
For each test, I will indicate a tentative letter grade for your test score. However, the final letter grade will
be based on a relative frequency distribution (percentile ranking) of the total points accumulated over the entire
summer. This approach implies that your final grade will be determined by the relative performance of the entire
class. That is, there is no predetermined standard as to what constitutes an A, B, C, etc. (e.g., the cutoff for an
“A” may be below the 90th percentile ranking). Because of this relative ranking, questions about what your grade
or standing in class is cannot be answered until all tests have been taken and all projects turned in and graded.
Grades for each test are posted on eGradebook in UTDirect.
Test reviews:
Some class time may be allocated after each in-class test for a review of that test. The purpose of this
review is to reinforce the concepts covered in the test.
Tests will not be returned. After each test has been graded, designated times will be set aside for students
to individually review their exams. Students who cannot make these times should see me to schedule a review
time. After that time, they will be stored.
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Students who disagree with the grade assigned may, after the special review sessions, request a regrade of
the examination. This request must be in writing, giving the question in contention and the reason why the
student feels that the answer given is correct.
Test Policies
Students missing a test without my prior permission will receive the lowest grade awarded to students
taking that test. Students missing a test with my permission will have the points for the missed test added to their
final test. As an example, if you miss the in-class test, the points of that test will be added to the final. In
addition, I reserve the right to give a final that differs from that given to the students who are taking the regular
final.
Requests for excuse from a test must be made in writing (email is OK) and, except for extreme
emergencies, prior to the test.
It is not necessary to purchase a special financial calculator for this course; however, calculators used in
this course should have exponent, root and IRR functions.
I will give notice when the time for an exam has expired. I will give two minutes for students to complete
their work and turn in their exams. Students who do not turn in their tests by the time I have indicated will have 5
points deducted from their test grade.
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Finance 376
Sample Exam
Fill in the Blank
Write in the proper work or words in the space provided. The word(s) you select must be the proper ones as used
in class and in the text. Each question is worth 3 points.
1. A ________________ currency is one where the price is fixed by supply and demand rather than by the
country's central bank.
2. The ______________________, created in 1958, has as its goal to gain for its members the economic and
political benefits to be derived from free trade, free capital movements and common tariff barriers.
3. Through ________________________ a country divests itself of the ownership and operation of a
business venture by turning it over to the free market system.
4. The __________________________ was originally established by the Bretton Woods Agreement to
render temporary assistance to countries trying to defend their currencies against cyclical, seasonal, or
random pressures on their exchange rates.
5. The ________________________ has replaced GATT and has more power to enforce the rules of
international trade.
Matching
Match the proper word or words with the statements by writing in the appropriate \letter in the space provided next
to the statement. Please note that there are more words than statements, so be careful and choose the best word for
each statement. Each question is worth 3 points.
6. _____ established a gold exchange standard whereby all countries were to fix the value of their currencies
in terms of gold but were not required to exchange their currencies for gold.
7. _____ contains an automatic price adjustment mechanism.
8. _____ marked an attempt to salvage the Bretton Woods Agreement by devaluing the dollar to $38 per
ounce of gold, revaluing other currencies upwards in relation to the dollar and expanding the allowable
trading band around par value.
9. ______ The earnings US residents receive from past investments made abroad.
10. ______ How we would define the purchase of a ticket to Disneyland by a Japanese tourist.
Performed service.
A. Balance of Payments B. Bretton Woods Agreement C. Capital Account
D. CHIPS E. Current Account F. Direct quote
G. Factor income H. Gold system I. Indirect quote
J. Jamaica Agreement K. Performed service L. Rio de Janeiro Agreement
M. Smithsonian Agreement N. SWIFT
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Short Essay
Give a concise answer to the following question. Your answer should not exceed the space provided. The
question is worth 20 points. (I’m giving several questions on this sample exam; however, there is only one
question on an actual exam.)
11. All firms competing in the international environment seek to exploit their comparative advantage. How
does the comparative advantage of an exporter differ from that of a true MNC?
12. The relationship between an MNC and a host government can be mutually beneficial. However, this
relationship can also lead to conflicts concerning what the goals of the MNC should be. What are these benefits
and conflicts?
13. Your two roommates are arguing over international trade. Jack says that pursuing more open trade would
be a bad policy for the Bush Administration, while Jill feels such a course of action would be beneficial. What do
you think? (Think through the various issues involved and be as complete as you can in your answer.)
Problems
Solve the following problems. Partial credit may be awarded depending on the nature of the problem. To obtain
credit for any problem you must neatly show all work and must write the answer in the space provided. Each
question is worth points as specified. (These quantitative questions are on topics appropriate for the second test.)
14. (8 points) Brackenridge Corp has invested some surplus cash in some government-insured British CD:
£1,000,000 for 90 days. Your pound interest rate is 6% per annum. Your bank provides the following
quotes on the dollar.
Bid Ask
Spot ($/£) 1.38 1.40
90-day forward ($/£) 1.44 1.46
Devise a spot-forward swap that would give you a locked-in dollar rate of return.
What is the dollar rate you will end up receiving?
15. You have received the following quotes from your bank (currency per U.S.$)
Currency Bid Ask
European euro 1.5060 1.5090
Japanese yen 98.36 98.42
a. (8 points) Calculate only the bid cross rate (€/¥)?(To receive credit for your answer, you must
show the diagrams for one-way arbitrage as I used them in class, using both numbers and
arrows. If you don't show this work, you will receive NO credit for this problem! Calculating
both the bid and ask cross rate will reduce the points you earn on this problem.
b. (5 points) Another bank offers you a bid quote of €0.01520/¥. Would you accept or reject this quote?
Why
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Appendix C: Instructor’s Evaluation and Grade Adjustments
Objective: You will truly benefit from this class only if you are an active participant in the course and in your
business education. I want to encourage your full participation by reserving part of the overall course grade to
reward this participation and by providing certain additional incentives and sanctions.
Instructor’s Evaluation:
Grading:
* I will observe student participation in the course and reward those students who make a
substantial effort. My evaluation will be based on:
°How well you have participated in class, looking at quality, not quantity.
°The quality of your performance in tests and other class projects
*Points awarded are at my discretion and are based on my opinion of your efforts. These points
are not automatically given, but must be earned. They are not subject to negotiation. Credit will not be on a
normal grading scale, but will range from 5% to 0% of the final course grade.
Grade Adjustments:
Penalties:
While you primarily bear the consequences of your actions in this course, your actions may also have a
direct effect on other students and myself. If you do not turn in assignments as scheduled you deny your fellow
students the feedback they have a right to expect and cause me a substantial amount of excessive administrative
work. In registering for my course you are entering into a contract with me that specifies the actions that we
mutually agree to. If you do not live up to your part of our agreement, you face certain penalties. I hope that no
penalties will be assigned this semester but you should, when planning your activities, keep the existence of these
sanctions in mind.
• Missing exams without my prior approval: As specified in Appendix B of this syllabus.
• Failure to turn in tests when requested: Five points deducted from that exam.
Extra points:
The Undergraduate Business Council’s VIP committee is sponsoring several speakers this semester. These
are interesting speakers and topics and I want to encourage you to attend. I will therefore add two points to the
fourth test grade of each student attending one of these sessions. You may earn only two points during the
semester. That is, even if you attend all sessions held this semester, you still get only two points. To get these
points you must register with the VIP committee at the time of the speaker, using procedures they have in place. No
registration, no points!
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Appendix D: Formula Sheet
Finance 376: International Finance
Formula Sheet
Part 1: The International Environment
Balance of Payments
B c + ∆R + B k + ε ≡ 0 Y = C + I + G + (X - M)
Y - C - T = I + (G - T) + (X - M) CA = S - (I + (G - T))
S-I = X-M
Part II: International Foreign Exchange Markets
Spot FX Market
Ask − Bid
Spread(%) = (100 )
Ask
Term ( ) (
S0 Term Base − S1 Term Base
(100)
)
( )
Percent change ( Base ) =
S1 Term Base
Term ( )
S1 Term Base − S 0 Term Base
(100)
( )
( )
Percent change ( Base ) =
S0 Term Base
Forward FX Market
Prem / Disc(Base) =
( ) (
F Term Base − S Term Base ⎛ 12
⎞( ) )
(
S Term Base )
⎝ n ⎠ 100
Prem / Disc(Term) =
( ) (
S Term Base − F Term Base ⎛ 12
⎞( ) )
F (
Term
Base ) ⎝ n ⎠ 100
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Part III: Forecasting Exchange Rates
( F)
F1 H ( )
= S0 H
1 + iH
St H( ) (1 + i H )t S0 H( F ) = F1 (H F )1 + iiF
1+
F 1+ i F (1 + i )t
F F H
PH = S H ( F )PF Pt
Pt −1
= 1+π S1 = S 0
1+π H
1+π F
e≅
π H −π F
1+ π F
e = pH − pF
⎡1 + π H , t ⎤ ⎡ 1 + π f ,t ⎤ 1 + iH ,t 1 + π H ,t
St = S 0 ⎢ ⎥ qt = S t ⎢ ⎥ (1 + i ) = (1 + ρ )(1 + π ) =
⎢ 1 + π f ,t ⎥
⎣ ⎦ ⎢1 + π H , t ⎥
⎣ ⎦ 1 + iF ,t 1 + π F ,t
⎛ 1 + iH ,t ⎞
iH − iF = π H − π F S t* = S 0 ⎜ ⎟
⎜ 1 + iF ,t ⎟
⎝ ⎠
Part IV: Financial Markets: Capital and Derivative
Part V: Foreign Exchange Exposure and the Firm
∆Q
% ∆Q Q
EP = =
% ∆P ∆ P
P
n F n H/F n
1 + rH = 1 + rF
S H/F
1 + PH
S 1 H/F = S 0 H/F
1 + PF
Potential Loss in Accounting Earnings
Size of Forward Contract =
F(R / L) − S * (R / L)
K d = (i f )(i er ) + Prin er
E D
K = Ke + K d (1 − T )
V V
+ g K e = K rf + β [K m − K rf ]
D1
ke =
P0
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