The International Finance module aims to:

• Describe, discuss and where appropriate perform numerical calculations relevant to, the use of currency derivatives for hedging, speculation and market pricing purposes.
• Describe and discuss mainstream theories of international macroeconomics, exchange rate determination and market efficiency; and, where appropriate, comment upon their relevance to actual (observed) exchange rate movements.

 A. Knowledge and Understanding:

• understand the characteristics of international financial assets such as currency forward contracts, futures and currency options
• be familiar with the concepts of risk, risk management, arbitrage and speculation.
• understand the concepts of hedging and assets replication
• have a thorough understanding of the main theories of pricing currency derivatives (forward contracts, futures and options).
• have a thorough understanding of key concepts in exchange rate theory such as purchasing power parity and interest rate parity
• appreciate the different theories of international macroeconomics and exchange rate determination (and their applications)
• understand the efficient market hypothesis in the context of the foreign currency market and the main hypotheses explaining deviations from it.

B. Intellectual Skills: 

• Apply and evaluate different concepts of exchange rate risk and risk management
• Analyse and evaluate different theories of international macroeconomics, exchange rate determination and market efficiency.

C. Discipline Specific Skills: 

• Apply models of exchange rate risk management to decision making in international finance
• Compare the effects of monetary and real shocks under different exchange rate regimes
• Illustrate and compare different theories of international macroeconomics and exchange rate determination
• Apply the theory of market efficiency, as well as the hypotheses explaining deviations from it, to decision making in international finance.

D. Transferable Skills: 

• demonstrate an ability to undertake mathematical analysis of international financial issues
• develop problem solving skills
• develop analytical and learning skills through class work exercises
• interpret real world international finance data

Teaching will take place in the Autumn and Spring semesters. There will be approximately 36 hours of lectures and 10 hours of classes. Students will be required to prepare and present class exercises during the year.

Students are expected to participate in classes. Class questions based on the material covered in lectures will be distributed to students in advance during lectures. Students will be expected to prepare answers in advance, and will also be expected to explain their answers during the classes. Questions will be asked in a variety of formats, mirroring those that the students can expect in the examinations, and will involve a mixture of theoretical and mathematical questions. These will generally require short answers, and will also involve examining the validity of statements, doing numerical calculations, and also providing a structure for answers to essay-type questions.

Indicative study hours:   200

The class test in week 7 of the Autumn semester is designed to test students on their understanding of spot currency markets, exchange rate risk, the various ways through which this affects the pricing of foreign exchange derivative contracts  (forward and futures); and the latter’s use for applications such as hedging, arbitrage and speculation. There are 4 questions in total; 2 questions in Section A and 2 questions in Section B.  Students are asked to answer both questions from Section A and 1 question from Section B.  Section A, which comprises of computational questions, counts for 60 per cent of the examination mark. Section B, which includes questions involving applied and theoretical sub-questions, counts for 40 per cent.

The class test in week 4 of the Spring semester is designed to test students on their understanding of currency option contracts, their pricing, and their use for the purposes of hedging, arbitrage and speculation. There are 3 questions in total; question 1 is compulsory; students are also asked to answer one question from questions 2 and 3. All questions carry equal marks.

The examination at the end of the Spring semester is designed to test students on their understanding of spot currency markets and currency derivates (futures, forward and option contracts) taught in the Autumn Semester; and the theories of international macroeconomics, exchange rate determination and market efficiency taught during the Spring Semester. There are 7 questions in total; 3 questions in Section A and 4 questions in Section B. Section A includes questions from the material taught in the Autumn Semester; section B includes questions from the material taught in the Spring Semester. Students are asked to answer 2 question from Section A and 3 questions from Section B. Each question carries equal marks. 

Autumn Semester

Spot exchange markets, arbitrage and least cost dealing; forward contracts in perfect markets and imperfect markets; currency futures contracts; introduction to currency options; pricing currency options using the binomial and log-normal model.

Spring Semester

Exchange rate parity conditions (Uncovered Interest Parity and Purchasing Power Parity); Fundamentals’-based models of the exchange rate and the current account (Mundell-Fleming, the flexible price monetary model, the sticky-price monetary model and the portfolio balance model); Foreign exchange market efficiency. 

Autumn Semester

Sercu, P. (2009), International Finance: Theory into Practice, Princeton University Press

Spring Semester

Copeland L.S. (2008), Exchange Rates and International Finance, fifth edition, Addison-Wesley.

Krugman P.R., Obstfeld M. And Melitz, M. (2011), International Economics: Theory and Policy, ninth edition, Pearson Education.