FIN 442/644 Winter 2021 - University of Alberta

School of Business Masahiro Watanabe University of Alberta

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FIN 442/644 Winter 2021

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This course focuses on advanced financial management issues encountered in global competition and international capital markets. Specific topics include (1) the economics and operation of the foreign exchange markets; (2) currency risk management and derivative securities; (3) cross-border capital budgeting and financing sources; and (4) risk and return in international investments.^* A number of tools and techniques are covered to explore the strategic role of the finance function in a multinational firm. Learning will be centered on class discussions, lectures, case studies, latest articles, and exercises.

The course is demanding and is designed to provide the best learning experience for serious students.

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• (Required) Butler, Kirt C., 2016, Multinational Finance: Evaluating the Opportunities, Costs, and Risks of Multinational Operations, 6^th ed., Wiley (ISBN: 978-1-119-21968-2).

The advantage of using Butler 6^th ed. is that the whole PDF book can be freely downloaded in one click from the publisher’s website through a UA connection (VPN required off campus to see the

“DOWNLOAD FULL BOOK” link; the UA library website links to a similar Wiley page).

The following books are optional. Note that necessary chapters from these books will be posted on eClass for free download.

• (Optional) Eun, Cheol S., Bruce G. Resnick, and Tuugi Chuluun, 2021, International Financial Management, 9^th ed., McGraw Hill-Irwin (ISBN10: 1260013871, ISBN13:

9781260013870).

Note: This is the U.S. edition. I recommend it over the Canadian edition, which is updated less frequently.

• (Optional) Eiteman, David K., Arthur I. Stonehill, and Michael H. Moffett, 2019, Multinational Business Finance, 15th ed., Pearson (ISBN-13: 9780134796550).

Course Packet

A required packet of cases and supplemental readings is available for purchase from Ivey Publishing in either digital ($13.50) or print ($19.38) format. Please follow the instruction on eClass.

Lecture Notes

Lecture notes will be posted on eClass at least two days before the class. The best way to

* The course does not cover international taxation or international accounting.

prepare for class is to read them beforehand, in addition to required readings.

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The prerequisite for the course is FIN 301 (Introduction to Finance). The course requires algebra and statistical analysis. You must be familiar with basic operations in Excel.

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The exercises are designed to internalize the principles presented in the course. There are four exercises, one each for the four subjects. The exercises should be completed individually or by a group of no more than four (4). In a group work, all members should contribute equally to each question, and must review and agree on the work before submission. Each assignment is due at the beginning of the class on the due date.

1. FX exercise: covers basic concepts and international parity conditions.

2. Dozier Industries case: risk management using currency derivatives.

3. Cross-border Capital Budgeting exercise: multinational project valuation.

4. International Risk and Return exercise: a data-driven investment exercise.

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There will be a midterm exam and a final exam. The midterm exam is given in class. The final exam is comprehensive, but with a focus on materials after the midterm. Expect questions based on the exercises and cases to appear in the exams. Exams must be taken in your registered section. Representative exam questions will be made available online prior to the exams.

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The final letter grade is assessed based on the exercises, exams, and class participation. The graded components receive the following weight in the final grade:

Total

FX Exercise (groups) 10%

Dozier Industries Case (groups) 10%

Cross-border Capital Budgeting Exercise (groups) 10%

International Risk and Return Exercise (groups) 10%

Midterm Exam (individual) 30%

Final Exam (individual) 30% 100%

Class participation (individual, optional) (5%) 105%

The exams should be completed individually. You should build in time to write and proofread anything you turn in for this course.

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All assignments and exams must be turned in on time. Those turned in after the deadline will be penalized by 20% of assigned points for each 24 hours delay (or portion thereof) in submission. Work turned in after the delivery of the answer key will receive no credit.

Consistent with the University policy (summarized in the Class Record Book on the Registrars webpage), if you miss an exercise or an exam without acceptable excuse, a final grade will be computed using a raw score of zero for the work missed. Unacceptable reasons include, but are not limited to, personal events such as vacations, weddings, and travel arrangements. If you miss an exercise or an exam for an acceptable reason, you must present supporting documentation to me within two working days or as soon as you are able, having regard to the circumstances underlying the missed work. In case

of incapacitating illness, a medical note is not required. However, you can choose to submit one. The weight for the missed work will be shifted to the final exam. If you miss the final, you must complete a make-up exam and/or project, whose workload is equivalent to the amount of missed work during the course.

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Any re-grading request must be made in writing with a clear argument for additional credit. The request must be submitted within a calendar week from the delivery of graded work, or before the final course grade is filed, whichever is earlier. The whole work will be re-graded, which can result in a lower score.

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Class participation will represent a portion of your grade (see “GRADES”). Participating in class allows you to practice critical thinking and listening skills while developing the ability to balance advocacy for your own ideas with inquiry into the ideas of others. Use the discussion to expand your understanding of different perspectives.

The midterm exam and exercises (except for the last exercise) will be graded and returned to you for feedback.

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The cases have been selected to highlight, in an applied setting, specific tools important to international finance. Actually completing the case analyses is crucial for understanding the major elements of the course. Each individual is expected to be prepared to discuss the analysis. Class discussion will review the quantitative analysis as necessary and bring together many qualitative aspects of the case related to material covered in this course.

Students are to advise the instructor immediately if they have previously read any of the cases listed in the course schedule (attached to this syllabus) or discussed them in any course. Failure to advise the instructor of previous exposure to those cases would be grounds for a charge of academic misconduct to be brought. Students are not to have access to the teaching notes for those cases, and any evidence that the teaching notes were available to the student would also be grounds for a charge of academic misconduct.

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The Code of Student Behavior applies to all work in this course. Specific violations of the Code include, but are in no way limited to, the followings: 1) reference to or possession of any previous assignments, cases, or exams from FIN 442/644 or their equivalent regardless of the course number; 2) copying another group or individual’s work, assignment, case write-up, or exam; 3) giving or receiving help on the exam. If you are ever uncertain about what may or may not constitute a violation, please ask me.

The University of Alberta is committed to the highest standards of academic integrity and honesty. Students are expected to be familiar with these standards regarding academic honesty and to uphold the policies of the University in this respect. Students are particularly urged to familiarize themselves with the provisions of the Code of Student Behaviour (online at www.governance.ualberta.ca) and avoid any behaviour which could potentially result in suspicions of cheating, plagiarism, misrepresentation of facts and/or participation in an offence. Academic dishonesty is a serious offence and can result in suspension or expulsion from the University.

Recording in class is permitted only with the prior written consent of the professor or if recording is part of an approved accommodation plan.

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Any student with a documented disability seeking academic adjustments or accommodations is requested to speak with me during the first two weeks of class. All such discussions will remain as

confidential as possible. Students with disabilities will need to also contact the Accessibility Resources office (AR Exam Accommodations).

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Policy about course outlines can be found in Course Requirements, Evaluation Procedures and Grading of the University Calendar.

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During remote delivery, I will try to finish the class early. You are welcome to ask questions afterwards.

You can also make an appointment with me outside of class hours.

Masa Watanabe

Business Building, Room 3-30J Phone: 780-492-7343

email: [email protected] URL: http://www.ualberta.ca/~masa/

INTERNATIONAL FINANCIAL MARKETS /INTERNATIONAL FINANCE COURSE SCHEDULE

FIN 442/644 WINTER 2021

Required readings are shown in bullet points.

A. Introduction to Basic Concepts, International Parity Conditions 1. Jan 11 Introduction to International Financial Markets

• Butler, Sections 2.3-2.4

2. Jan 13 Foreign Exchange Rates: Currency and Eurocurrency Markets

• Butler, Sections 3.1-3.4

3. Jan 18 International Parity Conditions

• Butler, Sections 4.1-4.5

• The Economist, “The Big Mac index: Our interactive currency comparison tool”

4. Jan 20 Deviations from Parity Conditions

• Butler, Sections 4.1-4.5: continued Ex. #1: FX Exercise (Due Feb 3) 5. Jan 25 Parity conditions, continued

• The Economist, “The yuan-dollar exchange rate—Nominally cheap or really dear?”

B. Currency Derivative Securities and FX Risk Management 6. Jan 27 Currency Futures and Futures Markets

• Butler, Sections 3.5, 5.2-5.4 7. Feb 1 Dozier Case A

• Case, Dozier Industries, Part A

8. Feb 3 Currency Options and Options Markets

• Butler, Sections 6.1-6.2

Ex. #2: Dozier Industries Case (Due Feb 22) 9. Feb 8 Currency Options, continued

10. Feb 10 Dozier Case B

• Case, Dozier Industries, Part B

Statutory Holiday & Reading Week (Feb 15-19); no class or office hours 11. Feb 22 Advanced Hedging Strategies, Midterm Review, Course Survey

• Eiteman et al. 14^th ed., Appendix to Chapter 10, “Complex Option Hedges,” pp.305- 312.

12. Feb 24 Midterm Exam (in-class)

No class on Monday, March 1: Replaced by office hours, 12:00noon-4:20pm (due to Students’

Union Election Forum)

C. Cross-border Capital Budgeting and Joint Venture

13. Mar 3 Cross-border Capital Budgeting & Course Survey Feedback

• Butler Sections 13.1-13.3, 14.1-14.2 14. Mar 8 Joint Venture

• Case: “Beijing International Club Corporation (BICC)”

15. Mar 10 Adjusted Present Value (APV) Approach to International Project Valuation

• Eun, Resnick & Chuluun 9^th ed., Chapter 18

• “Firms Keep Stockpiles of ‘Foreign’ Cash in U.S.,” WSJ 1/22/2013 16. Mar 15 Discussion Question on APV

Ex. #3: Cross-border Capital Budgeting Exercise (Due Mar 29) 17. Mar 17 Currency Option Pricing I – Binomial Model

• Sercu and Uppal, Sections 7.1-7.3 18. Mar 22 Real Options in International Projects

• Butler, Chapter 16

• “Interview: ExxonMobil Weighs Australian Investment Plans,” Dow Jones, 7/19/2004 D. Risk and Return in International Markets

19. Mar 24 Benefits of International Diversification

• Butler, Sections 19.1 & 19.3

20. Mar 29 International Investment Strategies (Value, Momentum)

• Butler, Section 20.2

Ex. #4: International Risk and Return Exercise (Due Apr 12)

E. Miscellaneous Topics

21. Mar 31 International Investment Strategies (Home Bias)

• Butler, Section 19.4

• “Dollar to Rally—Or Retreat,” WSJ 7/29/2004

• “Why Overseas Stock Funds Are Back in Favor,” WSJ 9/10/2004 No class on Apr 5: Easter Monday

22. Apr 7 International Investment Strategies—cont’d

23. Apr 12 Topics in International Investments

• Butler, Section 19.2

24. Apr 14 (Last class) Unfinished business and review

Final Exam (date and time arranged by the Program Office during the final exam period):

FIN 442 B1 & 644 B1 (the section at 12:00pm): Date and Time TBA FIN 442 B2 & 644 B2 (the section at 1:30pm): Date and Time TBA FIN 442 B3 (the section at 3:00pm): Date and Time TBA

Disclaimer: There is not a one-to-one correspondence between the textbook materials and the lecture material. As we proceed through the course, I may add, drop, or change the topics.

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Below is the list of course materials. Materials not designated as required in the course schedule or not so instructed in class are optional. However, I may occasionally refer to them in class. Direct links to journal articles are provided in a separate file.

FX Markets and Parity Conditions

1. (Chart) International Parity Conditions

2. (Article) “The Big Mac index: Our interactive currency comparison tool,” The Economist, 7/15/2020.

3. (Article) “Buttonwood: The real deal,” The Economist, 10/29/2012.

4. (Article) “Swiss Move Roils Global Markets,” The Wall Street Journal, 1/16/2015.

5. (Article) “The yuan-dollar exchange rate—Nominally cheap or really dear?” The Economist, 11/4/2010.

6. (Article) “US-China trade dispute: US lifts China ‘currency manipulator’ tag ahead of trade deal,” Financial Times, 1/13/2020.

7. (Article) “Currency wars: The Trump administration labels China a currency manipulator,” The Economist, 8/6/2019.

8. (Article) “Currency Fight Hinders Talks on U.S.-Pacific Trade Deal,” The Wall Street Journal, 1/26/2015.

9. (Article) “The yuan: The cheapest thing going is gone,” The Economist, 6/15/2013.

10. (Article) “China’s currency: One way no more,” The Economist, 3/1/2014.

11. (Article) “The yuan joins the SDR: Maiden voyage,” The Economist, 12/5/2015.

12. (Article) “The internationalisation of China’s currency has stalled,” The Economist, 10/14/2017.

13. (Article) “Strong Dollar Squeezes U.S. Firms,” The Wall Street Journal, 1/28/2015.

14. (Article) “The global monetary system—Beyond Bretton Woods 2,” The Economist, 11/4/2010.

Currency Derivative Securities and Risk Management

15. (Case) Dozier Industries Case A, Darden case UVA-F-0745 16. (Case) Dozier Industries Case B, Darden case UVA-F-0746

17. (Book chapter) Eiteman, Stonehill & Moffett 14^th ed., Appendix to Chapter 10, “Complex Option Hedges,” pp.305-312.

18. (Article) “Hedge Funds Try ‘Career Trade’ Against Euro,” The Wall Street Journal, 2/26/2010.

19. (Article) “Exclusive - U.S. airlines confront cheap oil’s flip side: costly hedges,” Reuters, 12/23/2014.

20. (Book chapters) Sercu & Uppal (1995), Chapter 7, “Pricing Currency Options Using the Binomial Model,” pp. 201-232.

Cross-border Capital Budgeting and Joint Venture

21. (Case) “Beijing International Club Corporation (BICC),” Thunderbird Case #A06-03- 0009.

22. (Book chapter) Eun, Resnick & Chuluun 9^th ed., Chapter 18, “International Capital Budgeting,” pp.477-495.

23. (Article) “China’s Yuan Pares Losses Against Dollar,” The Wall Street Journal (online), 4/16/2012.

24. (Article) “The Fight for Hip Hotel Firm,” The Wall Street Journal (online), 4/16/2013.

25. (Article) “Firms Keep Stockpiles of ‘Foreign’ Cash in U.S.,” The Wall Street Journal (online), 1/22/2013.

26. (Article) “Euro-Zone Employment Hits Low of Nearly Seven Years,” The Wall Street Journal (online), 3/14/2013, by Alex Brittain.

27. (Article) “Interview: ExxonMobil Weighs Australian Investment Plans,” Dow Jones Newswires (available on WSJ online), 7/19/2004.

Risk and Return in International Markets

28. (Article) “Dollar to Rally—Or Retreat,” The Wall Street Journal, 7/29/2004, Page C14.

29. (Article) “Why Overseas Stock Funds Are Back in Favor,” The Wall Street Journal (online), 9/10/2004, Page C1.

30. (Article) “Investors Across the Globe Join the Party,” The Wall Street Journal, 3/31/2015.

31. (Article) “Is Your Foreign Fund Hedged or Unhedged?,” The Wall Street Journal, 11/19/2004 Page C1.

32. (Article) “European Markets Continue Their Strong Run,” The Wall Street Journal, 7/1/2005 Page C11.

33. (Article) “U.S. Investors Place Record Bets on Markets in Europe and Asia,” The Wall Street Journal, 8/4/2004, Page A1.

Miscellaneous Topics

34. (Article) “Japanese Firms Practice ‘Yen’ Damage Control,” The Wall Street Journal, 9/26/2003, Page A7.

35. (Book chapter) Eun, Resnick & Chuluun 9^th ed., Chapter 14, “Interest Rate and Currency Swaps,” pp.365-384.