Financial and Political Risk in International Trade
During the last 75 years the world has gradually become more and more integrated. International trade and capital flows have increased steadily. Few industries have been left unaffected by these trends. Understanding the risks organisations face when conducting business across international borders and in different currencies has become a key component of a modern business education.
This course covers questions of risk and risk management in an international setting, both from a financial and a political economy perspective. It will teach the students
- the rationale for regulation and the status of the current legislative and institutional regime (the ‘why’ and ‘how’ of market regulation)
- the effect of existing regulation, including the failure or success of implementation, and distributional consequences (the ‘uncertainties’)
- how these uncertainties constitute risk for individual firms, and how to manage them in a company/organizational setting
Rather than treating these broad themes solely at a general level, the course will apply them to three sets of challenges that are particularly pertinent to business in today’s global economy. These challenges are:
- International trade and the key international regulatory institutions
- Exchange rates and currency fluctuations
These challenges represent risks to all companies engaging in cross-border activities, and are therefore a useful starting point for anyone tasked with writing and implementing a risk management strategy. Moreover, they give us the opportunity to expose students to some of the contemporary debates not covered by other courses in this program.
International trade and institutions:
The course gives an introduction to comparative advantages, scale economies and market power as sources of international trade. It also gives an advanced but no-formal introduction to international trade.
Several international institutions regulate and monitor international trade. We study the role and history of these institutions, as foundation for a discussion on how they will respond to the new challenges arising from technological advances (in communication as well as production). In particular, we give an introduction to the EU institutions, international law on trade, and the WTO.
When writing contracts for operations in several countries, decision makers must understand the consequences on firms’ cash flows from changes in exchange rates as well as from differences in interest rates and the prices of goods across these locations. The financial part of this course has two main parts supporting this.
In the first part, we document that nominal exchange rates, which are the ones we observe, are volatile and unpredictable. We then introduce to concept of real exchange rates, which are the ones that business and policy makers fundamentally care about. We hypothesize that nominal-exchange-rate changes are reflections of changes in price and cost levels. Rejection of this hypothesis leads us to conclude that real exchange rates are almost as volatile and unpredictable as nominal exchange rates. We then hypothesize that nominal-exchange-rate changes are reflections of cross-country differences in interest rates. Rejection of this last hypothesis leads us to conclude that exchange rates are highly risky.
In the second part we study the tools that business have to hedge exchange-rate risk and how to evaluate these financial instruments. In particular, we will cover forwards/futures, and to a lesser extent options, and swaps. Finally, after having documented that exchange rates are risky and that economic decision makers have the tools to hedge this risk, we ask under what circumstances these hedging tools should be used.
The sustainability challenge will define future economic activity. In this part of the course we will investigate the rationale for the UN Sustainable Development Goals, and look at how they constitute both opportunities and threats. We will discuss how the natural environment impacts both the social and the economic spheres, and that the SDGs encourage seeing these different spheres as interconnected. Then we will look at how the quest for sustainable solutions are operationalised in different sectors (e.g., with initiatives for ‘green banking’ and ‘emission free constructions’) and implemented both at national and regional (EU) levels. The final theme in this part will cover the challenges faced by firms when they shall implement sustainable strategies. Relevant questions here will be ‘How much is enough?’ and ‘How can we encourage sustainability progress whilst discouraging “greenwashing”?’
Our approach to sustainable solutions requires us to include ethical considerations. We shall discuss both inter-national and inter-generational justice.
This is an excerpt from the complete course description for the course. If you are an active student at BI, you can find the complete course descriptions with information on eg. learning goals, learning process, curriculum and exam at portal.bi.no. We reserve the right to make changes to this description.