Final Study Guide

Recommended reviewing method:

1. Go over lecture slides together with the notes taken in class. Pay special attention to new concepts and examples. When confused, refer to the corresponding section in your textbook. The topics listed in this guide should help you keep the big picture in mind. 2. Use the practice questions posted on iLearn, assignment problems, and other end-of-chapter problems in your textbook to test and reinforce your understanding. 3. Compile a cheat sheet with key formulas and concepts. 4. You are always welcome to ask me questions via email, phone, or during office hours.

Ch 1 Multinational Financial Management

What is an MNC? How firms engage in international business? Why firms pursue international business? The pros and cons of centralized versus decentralized management structure of an MNC. The agency problems of an MNC. The valuation model for an MNC.

Ch 2 International Flow of Funds

What drives international flow of funds? Elements of Balance of Payments Growth in international flow of funds. Factors affecting international trade flows and capital flows. Pay special attention to the exchange rate effect. Understand the J-curve effect. Agencies that facilitate international flows: only need to understand the Ch2 practice questions regarding IMF, World Bank, and WTO

Ch 3 International Financial Markets

How financial markets serve MNCs? What are the motives for international fund users and suppliers? How do foreign exchange transactions take place? Interpreting foreign exchange quotations: direct, indirect, cross, bid-ask spread, appreciation, and depreciation

 Distinguish currency derivative market from the spot market. What financing options are provided by international money market, credit market, bond market, and stock markets? Examples of securities or loans available in these markets. Impact of governance on stock market participation and trading activity.

Ch 4 Exchange Rate Determination

Measuring exchange rate movements Basic market force determining equilibrium exchange rate: demand and supply Factors that influence exchange rates: the logic and direction of each separate effect, also understand in reality these effects intertwine. How to conduct speculation based on expected exchange rate movements? Understand that speculative activities may put immediate price pressure even before the anticipated event takes place.

Ch 5 Currency Derivatives
The concepts of and comparison between currency forward contracts, currency futures, and currency options (call and put). Hedging and speculation with the three types of derivatives. Factors affecting currency option premiums. Non-Deliverable Forward Contracts. Conditional Currency Options.

Ch 6 Government Influence on Exchange Rates

Reasons for and types of government intervention. Intervention as a policy tool. Different exchange rate systems. The pros and cons of fixed system versus the freely floating system. A single European currency.

Ch 7 International Arbitrage and Interest Rate Parity

Detect price discrepancies that make three types of arbitrage (locational, triangular, and covered interest arbitrage) feasible. How three types of arbitrage are executed?

 The relationships ensured by arbitrage activities. Understand that the key to arbitrage from an MNC's perspective is not the potential profits, but the relationships that should exist due to arbitrage. Pay special attention to the derivation and interpretation of the Interest Rate Parity.

Ch 8 Relationships among Inflation, Interest Rates, and Exchange Rates

Understand that both PPP and IFE are theories and may or may not occur in reality. For each theory, understand the following: Rational behind the theory, derivation of the theory, graphic analysis of the theory, using the theory to estimate exchange rate effects, implications of the theory, and the limitations of the theory.

Ch 10 Measuring Exposure to Exchange Rate Fluctuations

Arguments for and against the relevance of exchange rate risk. The concepts of and comparison between transaction exposure, economic exposure, and translation exposure. Be able to recognize examples of each type. Assessing transaction exposure based on portfolio risk. The influences and estimation of weights, standard deviation, and correlation. Assessing transaction exposure based on value at risk. Relevant value of the normal distribution function will be given. Assessing economic exposure based on forecasted income statement and regression analysis. The arguments for and against the relevance of translation exposure.

Ch 11 Managing Transaction Exposure

Be able to hedge foreign currency receivables and payables using 1) forward or futures hedge, 2) option hedge, and 3) money market hedge. Evaluating the hedge decision. Limitations of hedging. Alternative hedging techniques.