Ramon Llull University - Barcelona
IQS School of Business (AACSB Accredited)
Forum-Nexus Program
Graduate Division
Introduction
International financial markets have been in turmoil for the last three years. The world has faced one of the most severe financial and economic crises since the great depression. Never before has the proper understanding of international financial markets been more important than today. For governments, financial institutions, companies and students the grasp of the workings of the global financial system is crucial for making correct decisions that have wide-ranging implications: from policies for entire countries to investment and financing strategies for firms and personal career decisions for individuals.
Course Description
This course offers a broad introduction to the workings of the global financial system, the dynamics of the main financial markets, the nature and goals of the key financial institutions and the crucial role played by central banks and regulatory agencies. An important part of the course focuses on the 2007-2009 global economic and financial crisis, reviewing its causes and consequences, as well as evaluating the merits of the numerous government intervention schemes in the U.S. and Europe. The course ends with an assessment of the dramatic changes taking place in the global financial architecture as a result of the recent crisis.
Course Objectives
Upon successful completion of this course students will be able to:
Be familiar with the functioning of financial markets, both domestic and international.
Understand the role of key financial institutions, both domestic and international.
Examine the evolution of financial markets in the last decade and the excesses and abuses that placed the foundation for the global crisis.
Understand the role and responsibility of financial institutions, central banks and government agencies in contributing to the crisis as well as taking steps towards stabilization and recovery.
Examine the domino effect that resulted in the expansion of the crisis to Europe, Asia, Latin America and the rest of the world.
Examine the role of multilateral organizations as part of the global financial system.
Evaluate the key drivers of financial change (financial integration) in a global context.
Analyze impediments to the globalization of financial markets.
Evaluate the growth and development of specific international financial markets.
Analyze the impact of globalization via financial integration on the cost of capital.
Understand the specific challenges posed by the global crisis on European economies and European financial markets
Course Requirements
The course requires active student participation. Students are expected to read the assigned textbook chapters, cases and articles before every class. Punctual attendance is required. There will be a midterm exam, a final exam, case studies, and a team project. Each student is required to participate in a minimum of four professional visits.
Teaching Procedures and Methodology
Teaching methods used in this course include lectures, case discussions, team assignments, and professional visits. Learning in this course requires the student's constructive participation and active involvement in both class discussions and small group discussions. Small group discussions, in particular, are a key mechanism for facilitating learning from other team members. Thus, it is essential to attend all group activities inside and outside classes. The corporate visits will expose the participants to different aspects of the class and will highlight the practical relevance of the concepts learned. The visits will be accompanied by individual or group assignments.
Required Textbook
'An Introduction to Global Financial Markets', by Stephen Valdez,
Palgrave Macmillan, 5th Edition, 2006
'Fixing Global Finance', by Martin Wolf
Yale University Press, 2009
Supplementary Readings
Grosse, Robert and Kujawa, Duane, 'The Eurocurrency market' International Financial Markets and Institutions, International Business, Chapter 7, 1995
'Will Greece have to leave the Eurozone', Financial Times, Desmond Lachman, Jan 11 2010
'Rebuilding Greece's Finances; The best answer is to bring in the IMF', The Economist, Feb 4th, 2010
'Holding Together, A special report on the euro area', the Economist, June 13th 2009
'Country Forecast, Economies in Transition, Eastern Europe', EIU, May 2009 (p. 5-10)
'Country Forecast: European Union, regional review', EIU' Economist Intelligence Unit, Mar 2010
'Country Report: Spain' EIU, Mar 2010
'Country Report: France' EIU, Feb 2010
'Country Report: Italy' EIU, Feb 2010
'Country Report: Greece' EIU, Feb 2010
Supplementary Videos
'The Crisis of Credit Visualized', Crisisofcredit.com, YouTube
'Learning from and Responding to the Financial Crisis', Yale University, Robert Shiller and Lawrence Summers, Academic Earth
Case Studies:
Financing of Facebook: international financing case study
Team Project
This team project is designed to provide students with the opportunity to review the benefits and drawbacks for countries in the Euro zone, and to evaluate the threats and challenges facing the Euro in the near future as a result of the global economic crisis / fiscal debt crisis now facing the European Union. Teams will be made up of 3-4 students each. The project must include the following sections:
I. Country Selection
Graduate students are required to include in their analysis: the UK; at least one country from the Forum-Nexus trip (Spain, France, Italy or Greece); at least one of the 'East-central' European states: Czech Republic, Hungary, Poland, Slovakia, Slovenia); at least one of the Baltic States: (Estonia, Latvia, Lithuania), AND at least one of the Balkans: (Albania, Bosnia and Herzegovina, Bulgaria ,Croatia, Macedonia, Montenegro, Romania, Serbia)
II. Analysis
An in-depth analysis will be completed, looking at the Euro zone countries. Students will be asked to answer questions such as: 'During the recent global economic crisis: What are the benefits to countries for being inside / outside of the Euro-zone?', 'What have been the benefits / drawbacks of being outside?'; How does this discussion relate to our class lectures on 'fixed vs. flexible exchange rates'; Students must highlight the risks of borrowing abroad, and relate this discussion to class lectures on this topic. For extra credit, students will be asked to Compare and contrast the experience of 'Ireland vs. Iceland' during the global economic crisis (with relation to 'fixed, flexible exchange rates', and to 'borrowing in foreign currencies'
III. Recommendations & Predictions for future
After analyzing the current situation in these European countries, the students will be asked to make recommendations for how they think the fiscal crisis in Europe should be handled, as well as predictions for the long-term sustainability of the currency union.
The project report should be between 8 and 11 pages long (Font: Arial, 12; Line Spacing: 1.5).
Components of Final Grade
Midterm exam
20%
Final exam
30%
Team project
25%
Assignments (incl. Case study)
15%
Class participation
10%
Grading Scale
93-100%
A
90-92.9%
A-
87-89.9%
B+
83-86.9%
B
80-82.9%
B-
77-79.9%
C+
73-76.9%
C
70-72.9%
C-
67-69.9%
D+
63-66.9%
D
60-62.9%
D-
below 60%
F
Course Outline
Module 1
Purpose and benefits of globalized finance
Dangers of international finance - fast money
Challenges of economic forecasting
Types of international finance: Portfolio investing, FDI
Stock exchanges
Equity markets
Bond markets
Banking business model - borrow short, lend long
Fragility of banking - federal insurance, regulation, innovation
Liquidity vs. solvency - what is the difference, and how does it relate to the global economic crisis?
Moral hazard - do government guarantees cause more risky behavior?
Pyramid of promises - from Martin Wolf book
Understanding the size of international finance
Introduction to the various markets - stocks, bonds, currencies
Introduction to currencies
Avoiding risk, transferring risk
Future exchange rates - hard to predict
Understanding risk in foreign currencies
Hedging vs. Speculating in currency markets
Hedging: Introduction to forward contracts, futures contracts, options, deposit hedges
Financial markets and institutions in Spain
Financial conditions and policies in Spain
Fixed exchange rates vs. Floating exchange rates
Introduction to the 'dollar bloc' of managed exchange rates
Introduction to the 'Mundell Trilemma': Monetary policy, access to global capital, fixed exchange rates
History of change - from fixed to flexible regimes in exchange rate policy
Painful adjustment mechanism of fixed exchange rates: impact on unemployment, wages
Introduction to the Euro
Monetary policy outsourced to ECB
Unemployment issues in Spain
Introduction to Spanish banking: a two-tiered system of international banks and Cajas (savings banks)
Module 2
Introduction to Financial markets and institutions in France: Current financial conditions and policies in France as result of ongoing financial and fiscal crisis in Europe
Spain review - How can Spain regain competitive edge? Why doesn't Spain drop out? What is the risk? competitive devaluations. Productivity, pay cuts. Danger of civil unrest. Discuss risk in long terms if inflation picks up, and if the ECB is forced to raise interest rates BEFORE Spain's economy picks up.
Advanced discussion on: Fixed vs. Flexible exchange rates; Mundell Trilemma; monetary policy; controls of global capital flows; threats to the Euro; devaluation; competitive devaluations - a continuation of discussion from Module 1.
Introduction to the unique relationship between the USA and China in international finance, using the framework of the 'Mundell Trilemma' as a guide to in class discussion.
Dollar bloc of nations, managed currency rates and their impact on global finance.
Benefits and drawbacks of 'strong' vs. 'weak' currencies
Monetary Policy defined
Fiscal Policy defined
Inflation - causes, consequences, and impact on monetary policies. With a special look at the European Union, interest rates and the ECB
National debts and inflation
Risks of borrowing abroad in foreign currencies
Risks of inflation from a lenders perspective, from a savers perspective
Deflation - a look at the Japanese lost decade(s), and lessons for the US & Europe in the face of the global economic crisis
Monetary policy and deflation
Stagflation - define, and look at US in 1970s
Compare US dollar vs. Euro - a look at two weaknesses of the two dominant global currencies. A look at which currency is likely to face negative speculation as to the sustainability long term of (a) fiscal deficits and (b) investor value.
Introduction to Financial markets and institutions in Switzerland
Midterm exam
Module 3
Financial markets and institutions in Italy
Financial conditions and policies in Italy
Understanding modern financial systems: Financial assets, trustworthy institutions, and property rights
Risk of borrowing abroad in foreign currencies. Risk of local currency depreciation.
Appreciation defined
Depreciation defined
Financial liberalization, removal of capital controls
Historical look at Breton Woods
Series of Crises - a historical perspective
Asian Crisis '97, Brazil crisis 1999, Argentina Crisis 2001-2002
Lessons from the Asian Financial crisis of 1997
Case Study: A look at Indonesia before and after the Asian Financial Crisis
Impact on policy in China and the 'dollar bloc' nations
Predicting forward rates: the Law of one price, and the Interest rate parity theorem.
International Fisher effect
Artitrage
Risk of borrowing money in Foreign currencies
Case study: Facebook international finance case study
Module 4
Financial markets and institutions in Greece
Financial conditions and policies in Greece
Arbitrage - risk free profits
Speculation in financial markets
How forward rates are set - interest rate differentials
Global macro hedge funds, vs Arbitrage hedge funds
Derivatives
Using derivatives to cut away unwanted risk
Market liquidity
Forwards, Futures, Options, Swaps - understanding the differences
Current accounts vs. Capital Accounts + National Balance Sheets
External financing of national deficits
Case Study: Greece and national deficits
Reducing current account deficits - cutting spending, wages, layoffs, and why politically unpopular
Fixed Exchange rates, Greece & the Euro
IMF - history, purpose, and controversy
Understanding IMF conditionalities
Lessons from the Asian Financial Crisis '97 - avoid the IMF at all costs
Keeping currencies undervalued to avoid current account deficits, and to avoid the IMF
'Fixing Global Finance' - Martin Wolf book recommendations
Legacy of the crises - dollar bloc, global imbalances
Causes of the 2007-2009 global economic crisis
Foreign currency reserves as I.O.U's
Risks to global economy going forward, with special focus on relationship between USA and China
Risk of US dollar depreciation, inflation, debts
Is there a risk of US default (insolvency) on foreign borrowing?
USA - unique position - borrowing in own currency
Exorbitant privilege, and US funding of demographic, social security bills
Global imbalances, the savings glut
US as "borrower of last resort"
Fragility of international finance: borrowing in hard currency
The European Economic and Monetary Union
The ups and downs of the Euro
The future of the Euro
Final exam
The 2007-2010 Global Crisis
Throughout the course we will be looking at the Global Economic Crisis of 2007-today, with discussion of the following factors:
Sub-prime lending
The 'housing bubble'
Mortgage lending and mortgage securitization
Collateralized debt obligations (CDO's)
Credit default swaps (CDS's)
The freezing of credit markets
The collapsing property prices, equity prices, economic activity worldwide
The demise of large financial institutions
The challenges facing large non-financial institutions
The implications of deleveraging
The 'shadow' banking system
"Pyramid of promises"
Importance of trust and property rights
Banking crisis + currency crisis= the "twin crisis"
The vulnerable Southern European economies ('P.I.G.S.')
UK, Switzerland and others outside the Eurozone
West Balkans, Baltics, Iceland: the value of stability during crisis
Debt levels in Eastern Europe
Carry trade unwinding: borrowing in Switzerland, investing in Hungary
UK and currency devaluations: the falling pound
JPMorgan Chase's acquisition of Bear Sterns
the US government take-overs of Fannie Mae, Freddie Mac and, effectively, AIG
the approval of TARP
the SEC's ban on the short-selling of certain securities
the joint action of a number of central banks in different countries to lower interest rates
the Obama stimulus plan
the stimulus plan in other countries
How to pay for the stimulus plans
Balanced budget constraints
the Geithner banking rescue plan
the rescue of the big automotive companies
the impact on China, Mexico, Brazil, Russia, and on emerging markets
The weakness of the Euro
International "reserve" currency: dollar vs. Euro
Optimal currency union
Competitive devaluations: "beggar thy neighbor"
Comparisons with other major crisis of the past
The Great Depression
The bursting of the 'dot com' bubble
Japan's 'lost decade'
Regulatory and policy responses needed to avoid a similar crisis in the future
The coming major overhaul of financial regulation
The need for closer cross-country coordination
The most likely characteristics of the post-crisis global financial architecture
Schedule of Classes and Professional Visits
The detailed schedule of classes and professional visits for each session is available online at www.forum-nexus.com/schedules Please note that this course will be offered as a Section 1 class.
Academic Integrity
The Ramon Llull University places a high value on the integrity, good conduct and academic honesty of all students. Students are expected to maintain high standards of academic integrity at all times. Any instance of academic dishonesty, including plagiarism, will result in a grade of F for the course.
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