INTRODUCTION (FINA 7360)
What is so special about International Finance?
A couple of semesters ago a student asked me: "what is so special about
international finance that we need a special class?" His question motivated a
brief answer from another student: "otherwise, the professor would not have a
job!"
The first student, however, had a point in his question: a lot of the techniques and
concepts used in international financial markets are the same ones used in
domestic financial markets. For example, the same techniques used to value a
U.S. government bond are used to value a Japanese government bond. The
international financial market, however, has some features that are different
from the domestic financial market. This course identifies and studies these
unique features.
The economic and financial relations between countries have similar
characteristics to the relations between states within federal governments.
Countries, however, tend to have different economic and monetary policies.
National economic policies introduce barriers to the movement of goods, labor,
and capital. Monetary policies introduce different currencies. Then, barriers
to capital flows and exchange rates are unique features of the international
financial market.
Associated with the above mentioned distinctive international features we have
two specific international risks: country risk and currency risk.
These risks arise from the possibility of unexpected changes in national
economic policies and monetary policies, respectively. Since these risks are
specific to the international environment, there are specific tools and
techniques designed to deal with them. This course studies these specific
risks and the techniques used to minimize the impact of them in international
markets.
Besides studying exchange rates and the effects of national economic policies,
this course attempts to provide a complete tour of the major international
financial markets. This course covers foreign exchange markets, equity markets,
international bond markets, swap markets, and gold markets. This course
emphasizes risk management tools and techniques.
About the lecture notes
Ten years ago, I was asked to develop a new course devoted to international
financial markets. The first thing I did was to search for a good textbook. I
found that there are many excellent textbooks in international finance. I
also found, however, that none of them provided a complete coverage of all
international financial markets. My lecture notes
summarize the most important topics in a brief and concise manner, stressing
practical and applied issues.
These notes have been updated frequently. Every year, I add new material
and change and correct the old chapters. I am sure that, despite my efforts,
there are still errors throughout the text. I hope you can point these errors
to me, so the next class finds a better set of notes.
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