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Objectives:

This course is designed for MBA students for fostering their understanding and appreciation of the role and mechanics of international financial markets for mitigating exposure to foreign currency exchange rates, interest rates and commodity price changes. Derivatives, such as forward, futures, options and swaps are analyzed along their pricing and applications for managing foreign exchange and interest rate risk in transaction, operating and translation exposure from the perspective of the hedgers, arbitragers, and multinational corporations.

Grading: Plus/Minus Grading System

Test 1 25%

Test 2 25%

25%- for research paper to be presented on the last day of the class.

Cases 25%

Required Text: “Managing Global Financial and Foreign Exchange Rate Risk,” by Ghassem A. Homaifar, Publiser J. Wiley, New York, December 2003.

Lectures Topics

Global Markets: Transaction and Risks Chapter 1

Balance of Payment Exposure. Chapter 2 , this Chapter is followed by a case in the area of balance of Payments determinants, ( Kairos Capital inc or Fun in Finland, case no 1, cases in international finance 2^nd edition by Duffy and Giddy)

Exchange rate exposure chapter 3, this chapter will be followed by a short case in syndication of eurocurrency loans

International parity conditions in the financial markets

- Purchasing power parity

- International Fisher effect

- Covered interest arbitrage

Forward market efficiency

Application of Options and Futures for Managing Exposure: chapter 4,

The Application of Forward, Futures and Options for managing foreign currency exposure

- Options on futures

- Put call parity

Covered and Uncovered interest rate arbitrage, Inflation Interest rate and Exchange rate.

followed by analyzing the monetary approach to exchange rate determination, the macro picture.

Swaps, pricing and applications Chapter 7.

Interest rate swaps

Currency swaps

Motivations for swaps

Swaps risks

Interest Rate Risk Management Techniques for managing exposure to interest rates changes are covered in this chapter. Advanced topics in interest rates risk management such as:

Swaptions

Caps

Floors

Collars

Corridors

are covered along with their pricing and applications.

Transaction, Operating and Accounting Exposure Measurement and Management. Chapter 8.

Value at Risk VAR analysis and application

Hedging Currency exchange risk with various derivatives. Case #2 Lufthansa Air line

Case # 3 The Uncovered transaction : Rolls Royce Australia

Case #4 Grupo Zuliano Interest rate swap

Case # 5 Zapa Chemical ( Managing foreign currency exchange rate risk), students are required to graph various pay-offs from various hedging instruments using lotus and providing short and concise explanations as to the effectiveness of the various hedging instruments.

Debt, Equity and Other Synthetic Structures Chapter 9

Options on futures Chapter 10

Credit default swaps Chapter 11

Advanced topics in currency risk management

Credit and other exotic derivatives Chapter 12