International Finance

Duration

30h Th

Number of credits

Lecturer

Julien Hambuckers

Language(s) of instruction

English language

Organisation and examination

Teaching in the first semester, review in January

Schedule

Schedule online

Units courses prerequisite and corequisite

Prerequisite or corequisite units are presented within each program

Learning unit contents

In today's globalized world, managers, investors and policy-makers need a deep understanding of the international environment and its underlying mechanisms to take sound financial and strategic decisions.
In light of these considerations, this course is a seminar of financial economics and empirical international finance that focuses on foreign exchange (fx) rates theory and international parity conditions. In particular, the following topics will be covered: fx rate fundamentals (definition, distinction between direct vs. cross, real vs. nominal and spot vs. forward fx rates), fx rate dynamics (how are markets organized, who is participating in these markets, what are the drivers of fx rate changes?) and, more centraly, international parity relationships. Finally, we will also review the notion of country risk and systemic risk, and analyse recent views on the subject. If time permit, we will also discuss recent research on cryptocurrencies.
The course is divided in three parts: 
1) The theoretical course (oral lectures) focuses on presenting established theories of exchange rate behaviour and to compare their implications with empirical evidence. The goal is to provide the student with the necessary knowledge to understand the limitations of those theories, and the necessary intellectual tools to investigate and challenge empirical questions leading to investment decisions on international financial markets.
3) The second and most important part will consist in the redaction of a term paper (per group), aiming at replicating empirical findings of a peer-reviewed research paper (see reading list). In this term paper, the students are expected to conduct an empirical analysis of exchange rate data using the software R and the regression techniques used in mainstream financial economics (time-series regression, hypothesis testing, model selection). The students are expected to present their reference paper and their replication study during a seminar session.
3) A third part of the course will be dedicated to practical aspects of international trades and the functioning of the spot exchange rate market, around presentations of two practitioners.   

Learning outcomes of the learning unit

At the end of this course students will be able to
- understand the organization and the general functioning of FX markets, explain and synthetise this functioning.
- analyse the drivers of FX rates, and how they can be used to explain and anticipate some of the variations in FX markets;
- understand the theoretical international parities driving FX markets and explain these concepts.
- criticize and assess these theories, in particular in explaining their empirical limitations.
- read and understand cutting-edge scientific research on exchange rate.
- use simple regression models to replicate the empirical findings of scientific articles related to international parities, and explain and criticize their own findings.

Specific skills and competences trained during this course.
At the end of this course students will have:
- strengthened their knowledge and understanding of macroeconomic, finance and econometrics - in particular in international market finance;
- strengthened their capacity to research autonomously and methodically the information needed to solve a complex, transversal real-life economic and/or management problem, to perform a rigorous analysis of the problem at hand and to provide economically sound solutions; 
- understood the transversal role of quantitative reasoning, gained knowledge and understanding of these quantitative reasoning techniques and developed the ability to mobilize them in order to solve real-life economic and/or management problems or cases;
- developed their ability to speak in English; 
- developed team work abilities;
- developed basic programming and statistical analysis skills;
- developed a transversal, interdisciplinary and global vision;
- developed their critical sense (arguing);
- strengthened their professional capacity for oral communication;
- and strengthened their professional capacity for written communication.

Prerequisite knowledge and skills

- FUNDAMENTALS IN PROGRAMMING, in particular with R (notion of loops, basic algorithmic). It is expected of every student to be able to conduct a basic regression analysis with a statistical software (Gretl, R, Matlab, SAS) and to transfer this knowledge to the programming language R (or to do the full analysis in its own language). Some slides and videos will be available, but no IT support will be provided.
- Fundamentals in statistics (introductory econometrics, notion of univariate regression models, how to conduct hypothesis tests). Courses like Empirical Methods in Financial Markets (FINA0060), Financial Risk Modelling (FINA0064), Financial Data Modelling (FINA0063) or Advanced Econometrics (ECON0213) are good complement. Some more advanced statistical techniques will be discussed during the course.
- Fundamentals in macroeconomics (understanding of key aggregates, fundamental of trade, dynamic of market forces, definition of interest rates and commodities). A course like International Macroeconomics (ECON0307) is a good prerequisite.
- Fundamentals in finance (notion of arbitrage, net present values, financial markets). A course like Applied Financial Instruments (FINA0068), Financial Derivatives (FINA0052) or Banking and Insurance (FINA0051) is a good prerequisite.

Planned learning activities and teaching methods

The course is primarily a lecture, based on the book "International Finance and Open-Economy Macroeconomics", by G. Gandolfo, and "International Finance: Theory Into Practice", by Piet Sercu. During these sessions, the theoretical notions will be introduced and illustrated by practical exercises.
Secondly, the students are expected to work (in groups) on a term paper, which consists in replicating some of the important empirical findings in the literature regarding international parities. To this end, the students are expected to gather FX rates, interest rates and oil prices data, and to conduct a regression analysis in the spirit of the referenced papers with the program R. A short tutorial on regression analysis with R will be given during the class, but the students are expected to acquire the necessary knowledge by themselves (self-learning of R).


Finally, students are expected to participate to a seminar, where they will present and discuss the research papers used as a basis for the replication exercise. 

Mode of delivery (face to face, distance learning, hybrid learning)

The course consists in a face-to-face lecture, and a series of discussions/group work based for the exercises. The students are expected to work by themselves on the term paper and especially on the statistical analysis.

Organisational adjustments related to the current health context

Recommended or required readings

International Finance and Open-Economy Macroeconomics, by G. Gandolfo (Springer, 2nd edition)
International Finance: Theory Into Practice, by Piet Sercu
Uncertainty and deviations from uncovered interest rate parity, Ismailov and Rossi (2017), Journal of International Money and Finance.
Can oil prices forecast exchange rates? An empirical analysis of the relationship between commodity prices and exchange rates, Ferraro et al. (2015), Journal of International Money and Finance. 
Predicting Exchange Rates Out of Sample: Can Economic Fundamentals Beat the Random Walk? Li et al, (2015), Journal of Financial Econometrics.
Uncovered interest rate parity and the term structure, Bekaert et al. (200&), Journal of International Money and Finance.
Carry trades and currency crashes, Brunnermeier et al. (2008), NBER working paper.
Understanding Cryptocurrecies, Haerdle et al. (2019), Journal of Financial Econometrics
 

Assessment methods and criteria

Below you will find information on the evaluation methods planned for in-person and remote exams as well as those planned for hybrid sessions. Depending on how the health crisis evolves, the chosen method will be communicated to you no later than one month before the start of the exam session.

The final grade will be determined by the following three parts:

Written test (last course of December)
Explain international parities, what is the theoretical rationals behind, and what are the empirical evidence for and against these theories. Explain the various financial risks faced on international markets, and what are the tools to manage those risk. Solve exercises regarding the use of FX rates-based derivative products. Solve a case study, regarding an investment problem in the financial markets, explaining which management decisions are taken, and why (monetary quantification of the decision, rational in light of theoretical concepts). Explain various notions related to systemic risk.  
Seminar paper
Per group, replicate an empirical study e.g. "Uncertainty and deviations from uncovered interest rate parity" (A. Ismailov and B. Rossi, JoIMF, 2017) or "Can oil prices forecast exchange rates - an empirical analysis of the ralationship between commodity prices and exchange rates" (F. Ferraro et al., JoIMF, 2015). This list might evolved regarding preferences and profiles of the students attending the class. Then, in a 10-page research paper, the students are invited to present the problem of the reference the paper, implement and perform a similar empirical analysis, then present their analysis of the issue their results.

Participation
Active participation during the seminar and the presentations will lead to bonus points.


Weights between the different parts will be announced in October.

Work placement(s)

none

Organizational remarks

none

Contacts

Julien Hambuckers, Ph.D. | Assistant Professor of Finance
HEC - Management School of the University of Liège (Belgium) 
Rue Louvrex, 14, B-4000 Liège Belgium

email : jhambuckers[at]uliege.be

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