International Finance

Introduction

The overall goal of the course it to provide the participants with a sound understanding of foreign exchange markets and their role for the economy. The course is relevant for decision making by investors in the international arena, policymakers and multinational firms.

Investors and firms are increasingly becoming exposed to the international economy. This creates both opportunities and challenges for firms, investors and policymakers. A sound understanding of international markets is needed to deal with these opportunities and challenges. With increased globalization, markets have become more important and more complex. No models are able to capture this complexity. Multinational corporations that operate in this complex environment, need to critically assess different models and show their limitations with empirical tests. Similarly, policymakers and investors need to understand the environment where they operate. 

In the first part of the course, the students learn about the history and organization of international financial markets, with special emphasis on the foreign exchange market. In the second part, students learn different models for exchange rate determination, with special emphasis on macroeconomic determinants of exchange rates. The third part of the course will give students knowledge on issues in corporate finance, like capital budgeting, in an international setting. 

The second half of the course focuses more on the currency risk premia in order to understand exchange rates. First, students will learn about the market microstructure approach to exchange rates. Then, the course will go through different investment strategies involving exchange rates, and students will learn how to understand exchange rates through the lens of modern asset pricing. An important goal of the course will be to shed light on the long-term sustainability of fiscal and monetary policies in open economies, and of solutions to business problems faced by multinational corporations.

Course content

1. Background: international monetary system.
2. Foreign exchange markets. International trade and capital flows. International markets for short-term debt instruments.
3. Parity relations: Covered and Uncovered Interest rate Parity, Purchasing Power Parity, International Fisher effect.
4. Testing parity conditions.
5. Currency risk premia: sources and variation.
6. Carry trading and currency momentum. Creating and evaluating international investment strategies.
7. International capital budgeting. Capital structure and cost of capital.
8. ESG in currency investing
9. Exchange rate determination.
10. Foreign exchange microstructure: dealer behavior, liquidity and price formation.
11. Exchange rates, macro, financial intermediation and order flow. Explaining exchange rate movements.

During the course, the students will acquire the following skills:

• Understand why FX-rates fluctuate.
• Produce and evaluate FX-rate forecasts.
• Calculating the value of multinational companies.
• Understand the importance of heterogeneity of market participants for determination of exchange rates.
• Create and evaluate investment strategies involving exchange rates.
• Be able to evaluate different sources of variation in currency risk premia and the implications for the macroeconomy.