The programme covers six main areas delivered in four days of teaching:
1. Currency markets, exchange rate determination and forecasting
We begin by looking at exchange rate forecast theories including purchasing power parity, and uncovered and covered interest parity (PPP, UIP and CIP). We then take the theories to the data, and show that they are poor at explaining and forecasting short-run exchange rate fluctuations. We discuss the carry trade, its recent collapse, and investing in foreign currencies as a stand-alone asset class. We then look at recent innovations in predicting exchange rate movements, such as the use of currency order flow as a forecasting variable.
2. Hedging foreign currency exposure using derivatives
Since exchange rates are excessively volatile, unpredictable in the short-run and an important component of most foreign investments, hedging foreign exchange rate exposure is crucial. We examine how hedging exposure to exchange rates, using derivatives such as currency options, swaps and futures, helps to control risks in global investments. We will then work through the mechanics of several transactions to understand the issues involved in implementing hedging strategies.
3. International portfolio investment
We extend the single-country CAPM to an international setting in order to understand how to evaluate the expected return on investments overseas. We then study the pros and cons of international portfolio diversification, and examine the actual returns to foreign equity and debt investments. We discuss optimal currency hedging for equity and bond portfolios.
We look at how international investors have allocated capital, examining the behaviour of international investment holdings and capital flows using the latest data. We then discuss the phenomenon of global financial contagion to understand the impact of behavioural factors.
This section will include an overview of international asset allocation frameworks used by leading investment managers BlackRock.
4. Country risk
When investing overseas, especially in emerging markets, country risks like political risk, and the risk that governments will impose capital controls on withdrawals, are very real. This section of the course investigates the sources, measurement and management of country risk.
5. International tax planning
As several countries may have a claim to tax the income or capital gains of international investments there is potential for multiple taxation. We illustrate the claims from source, fund and resident countries on investment returns, classic and modern fund management structures, and the impact of recent legislation to understand how to minimise the risk and the total tax burden.
This section is taught with the help of real cases from the professional services firm KPMG.
6. International corporate governance
The Satyam scandal has demonstrated that differing corporate governance standards in various jurisdictions are an essential factor to consider when contemplating cross-border investments. We discuss how corporate governance standards differ across countries, the risks posed by inadequate investor protection, and how best to recover capital invested overseas in situations of tunnelling or expropriation by managers or executives of the firm.
This section will feature a guest lecture from international law firm Allen and Overy.