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FINA521 International Financial

Prerequisite: None
Administrative Information:
Class Duration:
Campus Phone:

January 5 to March 29, 2011

Friday / 1:30 p.m. - 5:15 p.m.
Annandale1 Campus
(703) 941-0949 ext. 12

Instructor Contact Information:

Office Hour Location:

Steve Lebischak, Adjunct Professor



202 213 9373

Instructional Material:
Jeff Madura, International Financial Management, 10th Edition, ISBN

Course Description and Learning Outcome:

Businesses evolve into Multinational Corporations (MNC) to
capitalize on international opportunities. Their financial managers
must be able to assess the international environment, recognize
opportunities, implement strategies, evaluate exposure to risk,
and manage that risk. The MNCs that are most capable of
responding to changes in the international financial environment
will be rewarded. The same can be said for the students who may
become the future managers of MNCs.
Teaching Method:

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This class will mainly rely on lecture with problems and exercises
worked outside of class by the student. The instructors role is to
supplement and enrich the information provided in the textbook.
To that end, current events and practical applications will be
presented to reinforce concepts presented in the text. Class
discussion is highly encouraged and time will be allocated to
answer questions, discuss, and reflect on information in the text.
Students role is to read the chapter in advance of the lecture and
study the textbook and the various readings provided during
This course emphasizes the importance of relating theory to real
world applications so the project will be an integral part of this

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Course Schedule and Outline:




Jan 07

Overview, International
Flow of Funds

HW 1

Jan 14

International Financial
Markets, Exchange Rate

HW 2

HW 1

Ch.3, 4

Jan 21

Currency Derivatives,
Government Influence on
Exchange Rates

HW 3

HW 2

Ch.5, 6

Jan 28

International Arbitrage
and Interest Rate Parity,
Among Inflation, Interest
Rates, and Exchange

HW 4


Ch.7, 8

Feb 04

Forecasting Exchange
Rates, Measuring
Exposure to Exchange
Rate Fluctuations

HW 5

HW 4

Ch.9, 10

Feb 11

Managing Transaction
Exposure, Managing
Economic Exposure and
Translation Exposure

HW 6

HW 5

Ch.11, 12

Feb 18

Mid Term Exam Ch 1 to

Ch 10

Feb 25

Direct Foreign
Investment, Multinational
Capital Budgeting

HW 7

Presentation 4

Ch.13, 14

Mar 04

International Corporate
Governance and Control,
Country Risk Analysis

HW 8

HW 7

Ch.15, 16


Mar 11

Multinational Cost of
Capital and Capital
Structure, Long-Term

HW 9

HW 8

Ch.17, 18


Mar 18

Financing International
Trade, Short Term

HW 10

Presentation 7
HW 9

Ch. 19, 20


Mar 25

Final Exam

Lecture Topic



Ch.1, 2

HW 10

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Course Requirement and Evaluation:

Evaluation will occur via quizzes, exams, homework assignments,
presentation, in-class exercises, case analyses, class participation, class
attendance, etc.
Homework Assignments: Homework is designed to give you an
opportunity to practice the decision-making techniques and
analytical skills we discuss in class. They are the best way to
prepare for midterm and final exams and succeed in this class.
Late assignments will not be accepted without a valid excuse.
In-class participation and attendance: The instructor wil
occasionally give you in-class problems/questions to work on and
will ask you to discuss your answers in class. The more you
participate, the higher points you will receive. Attending class is
extremely important. If you failed to meet the attendance
requirement set by UNVA, you will not pass this course. The class
attendance will be checked after each class ends.
Quizzes: The first 30 minutes of most classes will be time for an
open book quiz usually a multiple choice question and a
calculation question. Students arriving late to class will
likely not do well on the quiz for the week.
Exams: There will be two exams; midterm and final problems will
be similar to that of homework.
Project - Term Paper and Group presentation: Teams (if
there is less than 10 students in the class the project will be
completed individually) will be expected to produce a graduate
level paper that includes critical thinking regarding an
international finance topic. An in class presentation is also
required. The instructor will suggest topics that relate to the
chapters in the text. Topics need to be submitted for approval.
The paper requires students to develop a point, counter-point and
conclusion regarding a topic such as Should an MNC Reduce its
ethical standards to compete Internationally?
The presentation should be delivered in the form of MS
PowerPoint. Grading will be based upon individual and group
performance in the presentation and the paper. Team members
will also evaluate one anothers contribution to the effort.
(Upon students request, a student may work alone in a final
project for special cases).

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The deliverables will entail 1,000 possible points, broken down as

200 points


100 points

Class Participation, quizzes and Attendance

200 points

Final Project and Presentation

250 points

Midterm Exam

250 points

Final Exam

1000 points


The numerical score is then converted to a letter grade using the

following scale:
Above 900 - A
Above 800 - B
Above 700 - C
Below 700 - F
Supporting Material:
Professional Journals and Magazines:
The Economist
The Financial Times
Wall Street Journal (Note: Moodle now provides on line access to
The Journal of Economics and Management Strategy
American Economic Journal

Academic Integrity:
Academic honesty is non-negotiable. All assignments submitted in
fulfillment of course requirements must be the student's own work.
Plagiarism and/or any other form of academic dishonesty will not be
tolerated and will result in a grade of zero on the assignment. Students
should consult the Students Handbook on the University web-site or in
the University catalog.
Attendance, Absence, Lateness, Incomplete:

International students in the US on F-1 visas, and Students receiving

Veterans benefits are reminded that regular attendance is required.
The university is required by law to report excessive absenteeism by
students in these two categories.
In accordance with the policies of the University of Northern Virginia,
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class attendance is required. If a student has more than three absences

in consecutive weeks, he or she will be asked to meet with the
International Student Advisor. It is the student's responsibility to inform
the instructor prior to an absence from class. Messages can be left at
the instructors e-mail or phone. Students are responsible for work
missed during an absence.
Each class will start promptly at the scheduled time.
A course grade of incomplete will be given only under very unusual
circumstances, and only if the student has completed at least 75% of
the assigned work by the last day of class and only when an incomplete
contract is signed and approved.

Learning Resources/Library:
Utilization of library resources is an indispensible part of your education at the
UNVA. Our librarians are available to assist you from 9:00 a.m. to 10 p.m.
seven days a week. Please take advantage of this opportunity for assistance
to your success while you are here at UNVA.
The UNVA library offers an extensive range of resources, particularly online, for
student use. Our library subscription journal databases include:
o ABI Dateline
o ABI Global
Academic OneFile
Business & Company Resource Center
Business ASAP
Business Source Complete
Computer Database
Dissertations & Theses
EconLit with Full Text
Education Research Complete
Expanded Academic ASAP
General Business File ASAP
General OneFile
Health and Wellness Resource Center
Health Reference Center Academic
InfoTrac Custom Newspapers
Library, Information Science & Technology Abstracts
Literature Resource Center
Newsletters ASAP
ProQuest Psychology Journals
ProQuest Research Library
Student Resource Center Gold Edition
Teacher Reference Center
...and other article databases
The library also provides access to thousands of electronic books, including:
EBL Books
Safari Business & Tech Books

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...and other e-book collections

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Chapter Learning Outcomes:

Chapter 1 Overview
This chapter introduces the multinational corporation as having similar
goals to the purely domestic corporation, but a wider variety of
opportunities. With additional opportunities come potential increased
returns and other forms of risk to consider. The potential benefits and
risks are introduced.
Learning Objectives:
1. What is the appropriate definition of an MNC?
2. Why does an MNC expand internationally?
3. What are the risks of an MNC which expands internationally?
4. Why do you think European countries attract U.S. firms?
5. Why must purely domestic firms be concerned about the
international environment?
Chapter 2 International Flow of Funds
This chapter provides an overview of the international environment
surrounding MNCs. The chapter is macro-oriented in that it discusses
international payments on a country-by-country basis. This macro
discussion is useful information for an MNC since the MNC can be
affected by changes in a countrys current account and capital account
Learning Objectives:
1. Is a current account deficit something to worry about?
2. If a government wants to correct a current account deficit, why cant
it simply enforce restrictions on imports?
3. Why dont exchange rates always adjust to correct current account
Chapter 3 International Financial Markets
This chapter identifies and discusses the various international financial
markets used by MNCs. These markets facilitate day-to-day operations
of MNCs, including foreign exchange transactions, investing in foreign
markets, and borrowing in foreign markets.
1. Why do international financial markets exist?
2. How do banks serve international financial markets?
3. Which international financial markets are most important to a firm
that consistently needs short-term funds? What about a firm that
needs long-term funds?
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Chapter 4 Exchange Rate Determination

This chapter provides an overview of the foreign exchange market. It is
designed to illustrate (1) why a market exists, and (2) why exchange
rates change over time.
1. Why do exchange rates change?
Chapter 5 Currency Derivatives
This chapter provides an overview of currency derivatives, which are
sometimes referred to as speculative. Yet, firms are increasing their
use of these instruments for hedging purposes. The chapter does give
speculation some attention, since this is a good way to illustrate the use
of a particular instrument based on certain expectations. However, the
key is an understanding of why firms would consider using these
instruments and under what conditions they would use them.
1. What advantage do currency options offer that are not available with
futures or forward contracts?
2. What are some disadvantages of currency option contracts?
3. Why do currency futures prices change over time?
4. Why do currency options prices change over time?
Chapter 6 Government Influence on Exchange Rates
This chapter introduces the various exchange rate systems. In addition,
it stresses the manner by which governments can influence exchange
rates. Since exchange rate movements are critical to an MNCs
performance, and the government has much influence over these
exchange rates, the MNC is affected by government intervention.
1. If you were elected to choose between a fixed, freely floating, or a
dirty float exchange rate system, which would you choose for
your home country? Why?
2. Assume that both the U.S. and Europe experience high
unemployment. How can the U.S. central bank attempt to adjust
the dollar value to reduce this problem? Is the European central
bank likely to go along with the U.S. central banks strategy or
retaliate? Why?
Chapter 7 International Arbitrage and Interest Rate Parity
This chapter illustrates how three types of arbitrage (locational,
triangular, and covered interest) are executed. Emphasize that the key
to arbitrage from an MNC's perspective is not the potential profits, but
the relationships that should exist due to arbitrage. The linkage
between covered interest arbitrage and interest rate parity is critical.
1. Why are quoted spot rates very similar across all banks?
2. Why don't arbitrage opportunities exist for long periods of time?
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Present a scenario and ask whether any type of international arbitrage is
possible. If so, how would it be executed and how would market forces be
Chapter 8 Relationships Among Inflation, Interest Rates, and
Exchange Rates
This chapter discusses the relationship between inflation and exchange
rates according to the purchasing power parity (PPP) theory. While PPP
is a relevant theory, it should be emphasized that PPP will not always
hold in reality. However, it provides a foundation in understanding how
inflation can affect exchange rates. The international Fisher effect (IFE)
is also discussed in this chapter. This theory is also very important. Yet,
it should again be emphasized that this theory does not always hold. If
the PPP and IFE theories held consistently, decision making by MNCs
would be much easier. Because these theories do not hold consistently,
an MNCs decision making is very challenging.
Provide reasoning for why highly inflated countries tend to have
weak home currencies.
Provide a simple explanation of the difference between interest
rate parity (from the previous chapter), PPP (from this chapter), and IFE
(from this chapter).
Chapter 9 Forecasting Exchange Rates
This chapter stresses the value of reliable forecasts, but suggests that
reliable forecasts cant always be obtained. Because no single forecast
technique has been singled out as superior, various techniques are
mentioned. Whatever techniques the MNC chooses, it should monitor
performance over time. This chapter illustrates how this evaluation can
be accomplished.
1. Which forecast technique would you use if you were hired by an MNC
to forecast exchange rates?
2. Do you think there will ever be a published technical forecasting
model that you could use in the future to most accurately forecast
exchange rates? Why or why not?
3. Recall the theories of purchasing power parity (PPP) and international
Fisher effect (IFE) in Chapter 8. If these theories were used to
forecast exchange rates, which techniques would they be classified
as? Why?
4. Assume there is a regression model that was able to identify the
factors which affected exchange rate movements in a recent
four-year period. Also, suppose that the sensitivity of the exchange
rates movements to each factor was precisely quantified. Is there
any reason not to expect superior forecasting results from this
method in the future? Elaborate.
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5. What is the use of detecting a forecast bias?

Chapter 10 Measuring Exposure to Exchange Rate
This chapter distinguishes among three forms by which MNCs are
exposed to exchange rate risk: (1) transaction exposure, (2) economic
exposure, and (3) translation exposure. Each firm differs in degree of
exposure. A firm should be able to measure its degree of each type of
exposure as described in this chapter. Then, it can decide how to cover
that exposure using methods described in the following two chapters.
1. Describe in general terms how you would measure the transaction
exposure of a particular MNC.
2. What is the relationship between transaction exposure and economic
Chapter 11 Managing Transaction Exposure
A primary objective of the chapter is to provide an overview of hedging
techniques. Yet, transaction exposure cannot always be hedged in all
cases. Even when it can be hedged, the firm must decide whether a
hedge is feasible. While a firm will only know for sure whether hedging
is worthwhile after the period of concern, it can incorporate its
expectations about future exchange rates, future inflows and outflows,
as well as its degree of risk aversion to make hedging decisions.
1. Is transaction exposure relevant?
2. Why should a firm bother identifying net transaction exposure?
3. Should management of transaction exposure be conducted at the
subsidiary level or at the centralized level? Why?
Chapter 12 Managing Economic Exposure and Translation
This chapter shows how an MNC can restructure its operations to
reduce economic exposure. Such a strategy is related to the firm's
long-run operations, unlike transaction exposure. This chapter also
briefly describes how translation exposure can be reduced. Yet, the
limitations of hedging translation exposure should receive as much
attention as the hedging strategy itself.
1. Describe the economic exposure of a specific local small business in
your city.
2. Even if you believe translation exposure is relevant, is it worthwhile
to hedge it? Explain.

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3. Compare the degree of translation exposure between a small firm

whose foreign subsidiary generates 50% of its business versus a
huge exporting company with no subsidiaries.
Chapter 13 Direct Foreign Investment
The main purpose of this chapter is to illustrate why MNCs often use DFI
and to suggest the various factors involved in the DFI decision. The
specifics involved in quantifying costs and benefits of DFI are discussed
in the following chapter. Thus, this chapter should be covered in
general terms as to the costs and benefits of DFI. The chapter implicitly
suggests that each firm may benefit from DFI by capitalizing on some
unique perceived advantages of the foreign market. Yet, all DFI
decisions relate to the MNCs overall risk and return objectives.
1. Why would a large advanced MNC consider DFI in some less
developed country?
2. Assume that you produce plastic computer pieces for computer
companies. The pieces require very little technology. Where would
you like to establish DFI?
3. What factors would be considered when deciding whether a
subsidiary should reinvest earnings or remit them to the parent?
4. The DFI decision is related to marketing, finance, and management.
What is the role of each area in the DFI decision?
5. Do you think DFI is primarily intended to reduce production costs or
increase sales? Discuss.
Chapter 14 Multinational Capital Budgeting
This chapter identifies additional considerations in multinational capital
budgeting versus domestic capital budgeting. These considerations can
either be explained briefly or illustrated with the use of an example.
1. Create an idea for a firm to expand its operations overseas. Provide
the industry of the firm. Given this information, students should be
requested to list all information that needs to be gathered in order to
conduct a capital budgeting analysis.
2. How should a firm adjust the capital budgeting analysis for
investment in a country where the currency is extremely volatile?
3. How should a firm adjust the capital budgeting for investment in a
country where the chance of a government takeover is relatively

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Chapter 15 International Corporate Governance and Control

This chapter emphasizes how an MNC can be subject to governance.
The potential for corporate control can encourage MNC managers to
maximize value for their shareholders.
1. Why are MNCs subject to corporate control?
2. How should MNCs determine whether multinational restructuring is
3. What role does valuation play in the multinational restructuring
Chapter 16 Country Risk Analysis
This chapter attempts to acquaint the student with various forms of risk
that must be considered by a multinational corporation. Methods used
to assess country risk are defined. It should be emphasized that
country risk is often difficult to assess. Furthermore, it may change
over time. A firm should incorporate the country risk assessment in its
decision of whether to begin (or continue) business in a particular
country. If it decides to conduct business there, it should continue to
assess country risk as it decides whether to expand in that country.
1. How would you rate the country risk of the U.S.? Would your rating
change if you lived in a foreign country? Why?
2. Some people say that you cannot separate the political and financial
risk of a country. What does this mean?
Chapter 17 Multinational Cost of Capital and Capital Structure
This chapter explains why the capital structure and the cost of capital of
MNCs may vary with those of domestic firms. It also explains why the
cost of capital varies across countries. The disparity in the cost of
capital across countries is important because it can influence the MNCs
decisions on where to establish subsidiaries and where to obtain funds.
1. Why dont all MNCs attempt to obtain funds in countries where the
cost of capital is very low?
2. The cost of capital is very high in Latin American countries. Yet,
many MNCs continue to establish subsidiaries there. What
underlying factor that causes a high cost of capital can also enhance
the revenues of subsidiaries over time?
3. Explain why a firms capital structure may be dependent on the
countries in which it
Chapter 18 Long-Term Financing
This chapter introduces the long-term sources of funds available to
MNCs. Should the MNC choose bonds as a medium to attract long-term
funds, a currency for denomination must be chosen. This is a critical
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decision for the MNC. While there is no clear-cut solution, this chapter
illustrates how such a problem can be analyzed.
1. Why would U.S. firms consider issuing bonds denominated in a
foreign currency?
3. What are the desirable characteristics related to a currencys interest
rate (high or low) and value (strong or weak) that would make the
currency attractive from a borrowers perspective?
Chapter 19 - Financing International Trade
This chapter first suggests why international trade can be difficult.
Then, it explains the various ways in which banking institutions can
facilitate international trade by resolving problems faced by the
exporter and importer.
1. Assume that you receive a call from an old friend who has set up a
computer parts store. He says that he plans to begin exporting these
parts soon. What potential complications should he consider?
2. Why do exporters sometimes sell off their bankers acceptances?
Would they be better off obtaining a short term loan instead? What
information is necessary to answer this question?
3. What is the common role of a banking institution in international
trade besides financing?
Chapter 20 - Short Term Financing
This chapter explains short term liability management of MNCs. From
this chapter, students should learn that correct financing decisions can
reduce the firms costs. While foreign financing costs cannot usually be
perfectly forecasted, firms should evaluate the probability of reducing
costs through foreign financing.
1. If a firm consistently exports to a country with low interest rates and
needs to consistently borrow funds, explain how it could coordinate its
invoicing and financing to reduce its financing costs.
2. What is the risk of borrowing a low interest rate currency?
3. Assume that foreign currencies X, Y, and Z are highly correlated. If a
firm diversifies its financing among these three currencies, will it
substantially reduce its exchange rate exposure (as opposed to
borrowing all funds from one of these foreign currencies)?

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