FIN 644 Winter 2019 COURSE DESCRIPTION

School of Business Masahiro Watanabe University of Alberta

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FIN 644 Winter 2019 C

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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.

A typical three-hour session consists of two lectures separated by an ungraded group work to help you internalize the topics covered. This will give you an opportunity to interact with the instructor. 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).

Butler 6th ed. can be freely accessed on the UA library website.

The following books are optional. Copies of current or past editions will be put on reserve at the Winspear Library for 2 hour room use. They are also available for purchase at the book store. Note that necessary chapters from these books will be posted on eClass for free download.

 (Optional) Eun, Cheol S., and Bruce G. Resnick, 2018, International Financial Management, 8^th ed., McGraw Hill-Irwin (ISBN10: 125971778X, ISBN13:

9781259717789).

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, 2016, Multinational Business Finance, 14^th ed., Prentice Hall/Pearson (ISBN-13:

9780133879872).

Course Packet

A required packet of cases and supplemental readings is available for purchase from Ivey Publishing in either digital ($11.25) or print ($16.23) format. Please see the instruction on eClass.

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

Lecture Notes

Lecture notes will be posted on eClass at least two days before the class. The best way to prepare for class is to read them beforehand, in addition to required readings.

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The prerequisite for the course is FIN 501 or 503. The course requires algebra and statistical analysis.

You should be familiar with running regressions and performing optimization in a spread-sheet such as Excel or statistical software of your choice.

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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 major topics. The exercises should be completed individually or by a group of no more than two (2). 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 an emphasis on materials covered after the midterm. The exams are closed book and closed notes, but you can bring in one letter-size note sheet (both sides) in the midterm exam, and two sheets (both sides) in the final. Expect questions based on the exercises and cases to appear in the exams. Exams must be taken in your registered section. Sample exams will be made available prior to the exams.

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

Total

FX Exercise (groups) 6%

Dozier Industries Case (groups) 6%

Cross-border Capital Budgeting Exercise (groups) 6%

International Risk and Return Exercise (groups) 6%

Midterm Exam (individual) 30%

Final Exam (individual) 40%

Class participation (individual) 6% 100%

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 (or portion thereof) delay 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 the 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-grade request must be made in writing with a clear argument for additional credit. The request must be submitted within a 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.

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Your class participation will represent a portion of your grade (see “GRADES”). Please create and display your name plate in front of you to receive a credit for your contribution to class discussion.

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. To receive a full credit for participation, I expect you to listen actively and respectfully to your colleagues’ comments. I may “cold call” to ensure you have been listening, and you should be ready to discuss both class content and the comments of your colleagues. Whenever possible, you should build upon or help clarify other students’ insights. Your contributions should demonstrate both your own ideas and your ability to analyze those of your colleagues. Side discussions, excessive late arrivals, and other interruptions are disrespectful to the class and will detract from your class participation grade.

I may occasionally check attendance by asking you to fill your name on a seat assignment sheet without any notice. This also helps me remember your name.

The midterm exam and exercises (except for the last exercise) will be graded and returned to you in class for feedback. Unclaimed exercises and exams indicate absence from classes and will negatively affect your class participation grade. These policies are consistent with the Class Record Book, which states that “Those who choose not to attend [classes] must assume whatever risks are involved.”

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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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You may use electronic devices to take notes. However, your devices may not make noise for courtesy to your classmates. A mechanical keyboard may violate this requirement unless it is silent. Another reason to discourage the use of a keyboard is that you will just scribe, rather than understand and internalize, what you hear. Also, my PDF notes are designed for you to often fill in numbers and draw charts, which is difficult with a keyboard. However, this policy does not apply if you require a keyboard for physical or medical reasons; please obtain my permission during the first two weeks of course (also

see “DISABILITY ACCOMMODATIONS”).

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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 644 or its 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 Specialized Support and Disability Services (SSDS).

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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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The office hours are 3:00pm-4:00pm on Wednesdays. To see me outside of the office hours, please make an appointment.

Masa Watanabe

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

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

INTERNATIONAL FINANCE COURSE SCHEDULE

FIN 644 WINTER 2019

Required readings are shown in bullet points.

A. Introduction to Basic Concepts, International Parity Conditions 1. Jan 7

a) Introduction to International Financial Markets

b) Foreign Exchange Rates: Currency and Eurocurrency Markets

 Butler, Chapter 1, Sections 2.3-2.4

 Butler, Sections 3.1-3.4 2. Jan 14

a) International Parity Conditions b) Deviations from Parity Conditions

 Butler, Sections 4.1-4.5

 The Economist, “The Big Mac index: Investors are gorging on American assets”

Ex. #1: FX Exercise (Due Jan 28)

B. Currency Derivative Securities and FX Risk Management 3. Jan 21

a) Currency Futures and Futures Markets

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

 Butler, Sections 3.5, 5.2-5.4 4. Jan 28

a) Dozier Case A

b) Currency Options and Options Markets

 Case, Dozier Industries, Part A

 Butler, Sections 6.1-6.2

Ex. #2: Dozier Industries Case (Due Feb 11) 5. Feb 4

a) Dozier Case B

 Case, Dozier Industries, Part B 6. Feb 11

a) Advanced Hedging Strategies b) Midterm Review

c) Course Survey

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

Statutory Holiday & Reading Week (Feb 19-23); no class or office hours 7. Feb 25

a) Midterm Exam (in-class) b) Course Survey Feedback

C. Cross-border Capital Budgeting and Joint Venture

8. Mar 4

a) Cross-border Capital Budgeting b) Joint Venture

 Butler Sections 13.1-13.3, 14.1-14.2

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

9. Mar 11

a) Adjusted Present Value (APV) Approach to International Project Valuation b) Practice Problem on APV

 Eun & Resnick 8^th ed., Chapter 18

 “Firms Keep Stockpiles of ‘Foreign’ Cash in U.S.,” WSJ 1/22/2013 Ex. #3: Cross-border Capital Budgeting Exercise (Due Mar 25) 10. Mar 18

a) Currency Option Pricing I – Binomial Model b) Real Options in International Projects

 Sercu and Uppal, Sections 7.1-7.3

 Butler, Chapter 16

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

11. Mar 25

a) Benefits of International Diversification

b) International Investment Strategies (Value, Momentum)

 Butler, Sections 19.1 & 19.3

 Butler, Section 20.2

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

 “Why Overseas Stock Funds Are Back in Favor,” WSJ 9/10/2004 Ex. #4: International Risk and Return Exercise (Due Apr 8) 12. Apr 1

a) International Investment Strategies (Home Bias) 13. Apr 8 (Last class)

b) Topics in International Investments c) Unfinished business and review

 Butler, Sections 19.2 & 19.4 Final Exam: 2 hours, time and place TBA

Selected Reserve Topics (time permitting, some chosen based on demand) a) Currency Swaps and Swaps Markets

 Eun & Resnick 8^th ed., Chapter 14

b) Currency Option Pricing II – Multi-period and Black-Scholes Models

 Sercu and Uppal, Sections 7.4-7.8 c) FX Financial Engineering

 Review the materials for session “Advanced Hedging Strategies”

d) Multinational Treasury Management

 Butler, Appendix 8A & Section 8.2

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 MS Word file.

FX Markets and Parity Conditions

1. (Chart) International Parity Conditions

2. (Article) “The Big Mac index: Investors are gorging on American assets,” The Economist, 7/12/2018.

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

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

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

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

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

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

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

Currency Derivative Securities and Risk Management

13. (Case) Dozier Industries Case A, Darden case UVA-F-0745 14. (Case) Dozier Industries Case B, Darden case UVA-F-0746

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

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

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

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

Cross-border Capital Budgeting and Joint Venture

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

20. (Book chapter) Eun & Resnick 8^th ed., Chapter 18, “International Capital Budgeting,”

pp.458-476.

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

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

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

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

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

Risk and Return in International Markets

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

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

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

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

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

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

Miscellaneous Topics

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

33. (Book chapter) Eun & Resnick 8^th ed., Chapter 14, “Interest Rate and Currency Swaps,”

pp.347-364.