Multinational Finance

Professor Philippe Jorion


Management 244

I. Course Description

This course examines the financial issues facing managers and firms involved in the international transfer of assets, goods and services. The main topics explored will be the foreign exchange market, the management of foreign exchange risk, and investment and financing decisions in international capital markets.

The course in organized into five parts. First, the mechanics of the foreign exchange markets are examined, with particular emphasis on forward, futures, and option contracts. These instruments are the primary tools for hedging and speculating in the foreign exchange market. The second part is devoted to the behavior of exchange rates, starting with an overview of exchange rate models, and expanding on empirical regularities, with applications to the forecasting of exchange rates.

This framework will be essential for analyzing how to deal with exchange risk . In the third part of the course we discuss economic versus accounting exposure, and whether exchange risk should be systematically hedged away.

The next part of the course is devoted to international investments: portfolio investments, international taxation, and capital budgeting. The emphasis will be on extensions of traditional financial analysis to an international environment. Finally, the course turns to the financing of foreign operations, including equity and debt funding.

II. Course Organization

Course Material - The required text is
Shapiro, Alan, Multinational Financial Management, (MFM) Boston, Massachusetts: Allyn and Bacon. 1992. Fourth Edition. A package of readings and assignments is also available.

GSM 209B (Investments), and therefore GSM 209A (Corporate Finance) and GSM 201A (Statistics). Students should be prepared to the fact that the course will need to build on mathematical and statistical concepts developed in core statistics and finance courses.

It may also be helpful to have taken the Speculative Markets course, which goes into the detail of using and pricing futures, swaps and options. The present course, however, only assumes the level of knowledge of the Investments class. As a result, there will be about one class of overlap with Speculative Markets.

The final grade will be approximately based on:

- classroom performance 5%
- assignments 10-15%
- midterm 25-35%
- final 40-50%
Classroom performance is based on quality of discussion and preparation of class materials. Assignments consist of problem sets, or exercises, and cases. Problem sets (exercises) are to be solved individually; cases may be studied in groups.

III. Course Outline

Topic and readings

1. Intro: the monetary system -- Ch.1,5; Jorion-K (Pp.123-154)
(1) The FX Market
Spot and forward rates -- Ch.2

2. Futures and options -- Ch.3; Ex: Forex

(2) Exchange Rates
3. Exchange rate determination --Ch.4,6; Ex: Futures & Options; Jorion-K (Pp.154-178)

4. Forecasting exchange rates --Ch.7

5. Review -- CASE: Mexico
*** MIDTERM ***

(3) Managing FX Risk
6. Accounting exposure -- Ch.8,9
Economic exposure -- Ch.10,11

7. Managing exposure -- Ch.10,11; CASE: Newport

(4) Investment Decisions
8. Portfolio investment -- Ch.16; Jorion, Intl Asset...
International taxation -- Ch.21

9. Taxes -- CASE: Dallas
Capital budgeting -- Ch.18

(5) Financing Decisions
10. Raising capital -- Ch.22

IV. Course Readings

Professor's Material:
1. Notes: The Foreign Exchange Market
2. Notes: Exchange Rates
3. Notes: Managing Foreign Currency Risk
4. Notes: Financing the International Firm
5. Notes: Prospects for Global Capital Markets

Exercise 1: The foreign exchange market
Exercise 2: Using futures and options
CASE: World Bank
CASE: Mexico
CASE: Newport Systems
CASE: Dallas Semiconductor

Supplementary Readings:
Jorion and Khoury, The Foreign Exchange Market: Nature and Dynamics, in Financial Risk Management, Cambridge, Mass.: Blackwell. Forthcoming in 1995. Pages 123-178.

Jorion, International Asset Allocation with Hedged and Unhedged Stocks and Bonds, Journal of Portfolio Management (Summer 1989): 49-54.

GSM - UC Irvine

Philippe Jorion