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BUS 5840 Financial Management Policy

Course Description

This course serves as an introduction of the three primary areas of concern to financial policy makers (capital budgeting, capital structure and working capital) and integrates this framework with a range of international financial concepts. Students will also explore the profound effect that foreign operations can have on financial statements.

Week 1

Lecture: Introduction
Lecture: The Global Financial Environment
Lecture: Theory of Comparative Advantage


  • Explain what is different about global financial management
  • Discuss the characteristics of the shareholder and stakeholder models
  • Explain the agency problem and methods to reduce it
  • Work problems illustrating comparative advantage
  • Identify and explain the different financial instruments involved in the 2008 financial crisis

Week 2

Lecture: Currency Basics and Currency Crises
Lecture: Exchange Rate Regimes
Lecture: Foreign Exchange Market (Note: Due to recent updates to scene 11, please review the online version of this lecture and not the CD version).


  • Explain basic currency terms and calculations
  • Identify and discuss the major currency crises of the past two decades
  • Discuss the main historical monetary system agreements
  • Complete arbitrage problems using gold
  • Examine the major exchange rate regimes
  • Compare and contrast fixed versus floating rate regimes
  • Discuss the advantages and disadvantages for countries that adopt the euro
  • Identify the main functions, participants and types of transactions in the foreign exchange market
  • Explain how exchange rates are quoted and be able to figure the quantity changes
  • Define direct, indirect, and forward quotes
  • Calculate forward premiums and discounts for direct and indirect quotes
  • Discuss cross rates and be able to do triangular arbitrage problems
  • Explore how to measure changes in spot rates using both direct and indirect quotations

Week 3

Lecture: International Parity Conditions—Part 1
Lecture: International Parity Conditions—Part 2


  • Define how exchange rates are determined
  • Explore the recommended forecast measures by period/regime
  • Explain overshooting
  • Analyze the Law of One Price, absolute and relative purchasing power parity
  • Work the “Big Mac” problem
  • Define the Fisher Effect
  • Discuss interest rate parity and how it links foreign exchange markets and the international money markets
  • Work covered interest and uncovered interest arbitrage problems
  • Define what “real effective exchange rates" are and when a currency is over- or undervalued
  • Explain the relationships between the parity conditions when in equilibrium

Week 4

Lecture: Foreign Direct Investment (Note: this chapter and its topics are critical in your country risk assessment project.)


  • Explain why firms become multinationals
  • Examine how firms maintain their competitive advantage
  • Define the OLI paradigm
  • Explore the modes, advantages, and disadvantages of foreign involvement
  • Define the types of political risk and how they can be assessed
  • Discuss how firms can reduce the risk of foreign investment for firm specific and country specific
  • Analyze the issues that are relevant in emerging market FDI
  • Explore the driving forces behind cross-border mergers and acquisitions

Week 5

Lecture: Futures
Lecture: Options
Lecture: Swaps


  • Identify the types and benefits of derivatives
  • Explain the contract specifications for futures contracts
  • Compare and contrast forwards and futures; understand the long and short positions and their payoffs
  • List the types of currency options
  • Explain the payoff and profit graphs for buying and selling both calls and puts
  • Examine the six basic sensitivities and how they affect currency option prices
  • Define interest rate risk and how firms can manage this risk
  • Define an interest rate swap and the specified components.
  • Set up a swap and show that both parties benefit
  • Define a currency swap and why it may be beneficial
  • Explain counterparty risk

Week 6

Lecture: Transaction Exposure
Lecture: Economic and Translation Exposure


  • List the three types of foreign exchange exposure
  • Explain the reasons to hedge and not to hedge
  • Define the causes of transaction exposure
  • Compute and compare the unhedged position, forward market hedge, money market hedge, and options market hedge
  • Define the types of hedges to use for accounts receivables and accounts payable
  • Explain the operating and financing cash flows and how they are measured
  • Examine the methods that firms may use to manage operating exposure
  • Discuss how a subsidiary’s characterization affects translation risk
  • List the two basic methods for handling translation risk
  • Explain the special provision for hyperinflation countries
  • Discuss how translation exposure can be managed

Week 7

Lecture: Global Cost of Capital
Lecture: Global Capital Budgeting


  • Use Beta and the WACC from the Financial Management course
  • Calculate the international CAPM and international WACC
  • Define the factors and their impact on the international WACC
  • Compare the COC of multi-national entities with domestic firms
  • Identify the basic steps for capital budgeting
  • Discuss the complexities that arise with a foreign project
  • Identify the issues that arose in the Cemex case and how they were resolved
  • Determine the NPV and IRR of international projects for both the individual project and the parent firm

Week 8

Lecture: International Trade Finance


  • List the three possible relationships of importers to exporters and what requirements are necessary for each
  • Discuss the trade dilemma and how it may be resolved
  • Identify the key documents used in international trade finance as well as their advantages and disadvantages
  • Explain forfaiting and how it is used
  • Discuss countertrade

The course description, objectives and learning outcomes are subject to change without notice based on enhancements made to the course. October 2013