The University of Texas at San Antonio
College of Business
Department of Finance
FIN 5833 International Financial Management
MB 0.226 Thur 7:00 - 9:45 pm
Dr. Yiuman Tse
Office: MB 2.432
Office Hours: Thur 6:00 - 7:00 pm, or by appointment
Text: Multinational Business Finance, 2009, 12th Edition, David Eiteman, Arthur Stonehill, and
Michael Moffett, Pearson/Addison Wesley
References: The Wall Street Journal, Business Week, Fortune, and The Economist
Prerequisites: FIN 5023. An elementary knowledge of statistics and PC is helpful in this course.
FIN 5633 recommended
Goal: It is a graduate course in international finance.
1. To provide a background on the international environment and to focus on the
managerial aspects from a corporate perspective.
2. To analyze the foreign exchange markets and instruments that facilitate trade
and investment activity on a global scale.
Syllabus: International monetary system; balance of payments; international parity conditions,
foreign exchange rate determination and forecasting; foreign exchange market and
derivatives; foreign exchange exposure; interest rate and currency swaps; market
microstructure of foreign exchange
Grade: Exam I (10/7 Thur 7:00 - 8:30 pm) .25
Exam II (12/9 Thur 5:00 - 7:00 pm) .35
Quiz and Homework .20
Term Project (12/2 Thur 7:00 pm) .15
Class Participation .05
Quizzes on the current issues of The Wall Street Journal et al. will be given every Thursday.
No make-up quizzes and exams will be given and late assignments are not accepted.
All exams and quizzes are closed book.
Appropriate academic accommodation will be made for any student registered
through the Office of Disability Services. Please note only the Office of Disability
Services, 210-458-4157, (http://www.utsa.edu/disability/) may issue instructions for
A statement of the UTSA Honor Pledge:
“On my honor, as a student of The University of Texas at San Antonio, I will uphold the
highest standards of academic integrity and personal accountability for the advancement of
the dignity and the reputation of our university and myself.”
Class Schedule (Subject to Change)
8/26 Chapter 2: Goal of Management (pp.24-27)
Chapter 6: Foreign Exchange Market (an introduction)
Discussion on Term Project:
2. Japanese Yen
3. Chinese Yuan
4. Gold and Silver
9/2 Chapter 3: Fixed vs. Flexible Exchange Rate (pp.60-61)
Chapter 4: Balance of Payments, Current Account, and Financial Account
Chapter 6: Foreign Exchange Market
9/9 Factors that Influences Exchange Rates
Mini-Case: The Revaluation of the Chinese Yuan (p.71-73)
9/16 Government Intervention
Chapter 5: What’s wrong with LIBOR? (pp.125-128)
9/23 Introduction to Futures and Forward Markets
9/30 Chapter 7: International Parity Conditions
Purchasing Power Parity and International Fisher Effect
10/7 Exam I
10/14 Chapter 10: Forecasting in Practice
Mini-Case: JPMorgan Chase’s Forecasting Accuracy (pp.274-276)
10/21 Chapter 11: Transaction Exposure
Mini-Case: Xian Janseen Pharmaceutical (China) (pp.301-303)
10/28 Chapter 22: International Trade Finance
11/4 Interest Rate and Currency Swaps
Chapter 9: Operating Exposure
Mini-Case: Toyota’s European Operating Exposure (p.326)
11/11 Chapter 13: Translation Exposure
11/18 Chapter 17: International Diversification and Risk
Mini-Case: Is Modern Portfolio Theory Outdate?
11/25 Thanksgiving holidays
12/2 Project Presentation
BASICS OF FOREIGN EXCHANGE MARKETS
Daily Global Foreign Exchange Trading Volume
1973 1983 1986 1989 1992 1995 1998 2001 2004 2007
Geographical Distribution of FX market Turnover
2001 2004 2007
FX Market Turnover by Currency Pairs
US dollar / US dollar / US dollar / US dollar / US dollar / US dollar / US dollar / US dollar / Euro / yen Euro /
euro yen sterling Australian Swiss Canadian Swedish other sterling
dollar franc 4 dollar krona 3
2001 2004 2007
Quotations for Currency Rates
The International Standards Organization Codes (ISO Codes), which are generally universally
employed in the interbank or over-the-counter (OTC) market. ISO Codes use three letters to
identify a currency. Usually, the first two letters refer to the country of origin and the third letter
refers to the name of the primary currency unit.
JPY = Japanese yen
CNY = Chinese yuan
MXN = Mexican Peso
A Forex transaction can be quoted in either currency, but it must always have two sides. The first
currency listed is the base currency and is always 1. The second currency listed, also called the
E.g., USDJPY = 106.10 means that for every U.S. dollar you receive 106.10 Japanese yen. The
U.S. dollar is the base currency, and the yen is the counter currency.
EURUSD = 1.5123 means for every euro you receive 1.5123 euro. The euro is the base
currency, and the dollar is the counter currency.
A. Direct quotation (American quotation)
EURUSD $/€ 1.5897-01
(euro to $) ($ per euro)
Bid price = 1.5897
Ask price = 1.5901
The bank trader will buy euro from you at the bid price of $1.5897 per euro.
The bank trader will sell euro to you at the ask price of $1.5901 per euro.
B. Indirect quotation (European quotation)
USDJPY ¥/$ 118.27-37
($ to yen) (yen per $)
Bid price = 118.27
Ask price = 118.37
The bank trader will sell yen to you at the bid price of ¥118.27 per dollar.
The bank trader will buy yen from you at the ask price of ¥118.37 per dollar
Assume you have $1M and the exchange rate of euro is 1.5897-01.
1. How many euros would you get by converting your $1M?
2. Suppose you reconvert the euro back to U.S. dollars. How many euros would you obtain?
3. How much did you lose due to this conversion of currency? (-$252)
Assume you have $1M and the exchange rate of yen is 118.27-37.
1. How many yen would you get by converting your $1M?
2. Suppose you want to reconvert the yen back to U.S. dollars. How many yen would you
3. How much did you lose due to this conversion of currency? (-$845)
Example 3: Cross Rates and Arbitrage
What is cross rate of EURJPY (or ¥/€)?
ISO Codes Bid Ask Spread Pips % Spd
EURUSD $/€ 1.5897 1.5901 0.0004 4 0.0252
USDJPY ¥/$ 118.27 118.37 0.1000 10 0.0845
Thus, the cross rate of EURJPY is
What happens if the cross rate of EURJPY is 188.34-50?
Suppose that the price (both buying and selling) of an ounce of silver is $6 in the U.S.
and the price is ¥700 in Japan. The bid/ask exchange rates of yen are 120.30/120.90.
What is the arbitrage profit in percentages that you can make? Show your steps
clearly. [Hint: you can begin with $100 or ¥100.] (Ans. 3.11%)
Measuring a Change in Spot Exchange Rates
1. Measuring a change in the spot rate for quotations expressed in home currency terms (direct
% = Ending rate – Beginning Rate
2. Quotations expressed in foreign currency terms (indirect quotations):
% = Beginning Rate – Ending Rate
Question 3 (p.161)
Which of the following currencies had the largest depreciation or devaluations during the July-
November 1997 Asian financial crisis?