The Globalization of Finance: Managing Returns and Risks

There are three ways a firm can be exposed to international financial markets and the risks related to them. Firstly, simply by trading internationally, it has introduced a new type of risk into its revenue stream associated with exchange rate uncertainty (as well as possibly other risks). If it is furthermore investing in fixed capital abroad, that introduces new types of risks, not only emerging in the markets as such but sometimes also of a political nature.
Finally, by acquiring portfolios of foreign assets or by getting funds from foreign sources, the firm is essentially behaving like an international financial investor and again this will enlarge the dimension of the associated risks.
The purpose of this course is to equip the student with the basic remedies to understand the workings of international financial markets and to understand how a firm or investment fund can best operate in them. These markets share many features with national financial markets and the fundamental economic principles needed to understand both are essentially the same.
The course offers a brief introduction to the economic theory of finance, including the essential concepts of expected return, risk and risk aversion and diversification. We shall also present, in the simplest way possible, the two approaches to pricing financial assets that have become standard in finance that of the CAPM model and that of arbitrage pricing.
There are at least two aspects of international financial markets not shared with national markets. Firstly the markets for foreign exchange and the risk associated with these markets and secondly the so called country risks, risks associated with a particular country. Being aware of the nature of such risks and knowing how to deal with them is essential for being able to operate efficiently in international financial markets.
We shall study how the markets for foreign exchange work firstly by studying brie by the different types of exchange rate systems one may find today as well as the links between international interest rates, inflation rates and exchange rate expectations and movements. The additional risks associated with foreign exchange markets call for special instruments with which the international firms can hedge their exposure and we cover some of these such as forward contracts, foreign currency futures, options and swaps.
For the firm, tapping international capital markets may allow it to obtain financing at a lower interest rate and, in general, at better terms. We shall both cover some institutional aspects of these markets as well as the theory of debt and equity financing in these markets. We shall also study these markets from the point of view of the investor who may be seeking better returns and a higher degree of diversification there.
Finally we shall consider how the firm may deal with political and country risks, risks which are difficult to quantify but none the less very important for the international firm. Target Students This course is relevant for students of business economics but also for those who (plan to) study international law and economics. The level of the presentation is somewhat formal and it recommended that you have some familiarity with abstract reasoning.