BUS614: International Finance

In this section, you will learn about the different financial instruments and the difference between bonds and stocks. Bonds are debt instruments, while stocks are equity instruments. This section also discusses other financial instruments, like derivatives, commodities, and mutual funds.

Stock ownership was traditionally handled by the issuance of physical certificates. Physical ownership is not common today; technology has replaced physical certificates or stocks with digital versions.

This article discusses stakeholders' rights, from the nomination of directors to how new shares issued by the company can be acquired. Bear in mind that these rights are not simply awarded to stockholders; rather, stockholders' rights differ depending on the class of the stock they own. There are different classes of stocks, and each one has its own set of rights. These differ from one company to another. What set of rights do investors normally have when acquiring stocks?

While you read this page, pay attention to the difference between equity and debt and how and when companies issue either instrument. One of the advantages of holding bonds over stocks is that bondholders have priority in being paid over stockholders. This happens because bondholders are technically loan providers rather than owners, as is the case with stakeholders. From a legal perspective, loan providers are on top of the hierarchy in receiving their rights should the company be liquidated. When would companies prefer issuing bonds rather than stocks? What are three differences between debt instruments and equity instruments?

This section discusses where stocks are traded and the difference between primary and secondary stock markets. You will become familiar with IPOs (initial public offerings), which are essentially when a company issues stock for the first time. IPOs are crucial for understanding the difference between primary and secondary markets. What are the different classes of rights that come from each type of stock?

So far, we've discussed stocks and the difference between stocks and bonds. However, we haven't elaborated on what bonds are and where they are traded. This section discusses bonds and the bond market. While you read, pay attention to how zero-coupon bonds, differed-coupon bonds, and split-coupon bonds differ. You will learn about municipal bonds, which are a way for governments, states, and municipalities to borrow money. Where are corporate bonds and government bonds traded?

This article discusses over-the-counter (OTC) markets and their role within the primary and secondary markets we discussed earlier. OTC markets are not subject to the same regulations as primary markets. OTCs are considered secondary markets, like stock exchanges such as the New York Stock Exchange (NYSE). These two secondary markets differ in that OTCs are decentralized markets, like NASDAQ, while stock exchanges are centralized and allow traders to meet and conduct their trading activities. What are the different financial markets?

This article covers how companies raise money. As we discussed, this can be done by issuing stocks and bonds. Of course, those are not the only ways for a business to raise capital. Another option is borrowing from banks. There is an ongoing debate as to whether traded loans should be considered debt securities or not. For loans to be considered tradable debt instruments, the following criteria need to be considered:

• "Loans which have become negotiable de facto should also be classified under securities other than shares" [1993 SNA (para. 11.75)]
• "Loans that have become marketable in secondary markets should be reclassified under securities other than shares and should be valued on the basis of market prices or fair values in the same manner as other types of securities other than shares" [GFSM 2001 (para. 7.111)].

How do bonds differ from bank loans?

So far, we've discussed primary and secondary markets and the role of issuers and end investors. However, there are more players in these markets, including brokers and investment bankers. What is their role within primary and secondary markets? How does online investing work?

This report expands on the topic of municipal bonds and discusses the different incentives attached to government bonds. These debt instruments are issued by states and government bodies to finance their investments and spending. In doing so, governments become lenders, which allows them to support specific sectors to help stimulate their economies. For example, how have some governments supported businesses during the coronavirus pandemic?

Read this article and pay attention to the difference between fiscal policy and monetary policy. Fiscal policy is directly related to government debt and financing. How do you think fiscal policy affects issuance of government bonds?

So far, we discussed when and why governments borrow and lend money. Now, we'll touch on how governments actually borrow money and manage debt. Debt management is crucially important for governments, given that the money they pay in interest on bonds comes directly from taxpayers' money. Do you think the government's decision to issue a specific number of securities has an effect on their yield?

Watch this as you work through the unit and prepare to take the final exam.

We also recommend that you review this Study Guide before taking the Unit 1 Assessment.

While you read this page, think about what the key financial institutions are and the role they play in the process of financial intermediation. How do each of these financial institutions differ from one another?

As you have seen earlier, there are many different financial institutions. Some are depositary, while others are non-depository. Before delving deeper into the difference between the two, it is important to probe how banks came into being and what kind of services they offered. When and where was the first bank established?

This timeline gives a quick reference to the different financial services that were introduced and the time of their introduction, focusing on the UK's financial services.

This section discusses the difference between commercial banks and investment banks. Why were these two banks' activities separated?

Central banks determine currency exchange rates and interest rates, among others. These institutions play a major role in ensuring and promoting the financial stability of a given country. In the US, the role of the Central Bank is delegated to the Federal Reserve. Here, you will learn more about the Federal Reserve and its structure.

What is the difference between central banks, investment banks, and commercial banks? What is the relationship between the Federal Reserve and other central banks?

While reading this, keep in mind what you learned earlier about the Fed and its structure. Here you will learn more about the different branches of the district banks and what they do. You will also come to know about the ECB and how it operates. What does central bank independence mean?

It is vitally important to understand the role of financial regulations. Some states opt for deregulations while others overly regulate. That said, understanding how regulations play a role in preventing crises is important. Why are central banks referred to as lenders of last resort?

Basel recommendations were enacted to help evade any financial malpractice that could negatively affect the national and international economy. It is important to keep up to date with the latest recommendations. This reference will elaborate on capital adequacy and the capital requirements in the US. What banks in the US are subject to comprehensive capital analyses and supervisory stress?

Watch this as you work through the unit and prepare to take the final exam.

We also recommend that you review this Study Guide before taking the Unit 2 Assessment.

Here, you will learn about determining interest rates and how supply and demand play a role in determining interest rates. Pay attention to the Fed's role in this determination and to the effects of the increase of money supply on interest rates. What are the determinants of interest rates?

When investing in bonds, understanding their yield is of utmost importance. They reflect the length and interest to be paid to the investor. Here you will learn why yields are indicative of investors' expectations. How would you estimate interest rates in the future using the yield curve?

Fixed-income securities provide investors with fixed periodic interest and the return of principal upon maturity. What are the different types of fixed-income securities?

Here you will understand the relationship between money markets and interest rates. You will also come to learn how real GDP has an effect on the demand for money. What effect does interest rate have on the demand for money?

We have discussed the role of supply and demand in the money market, and we have seen how it has an effect on interest rates as well. Here, you will learn how transfer costs and expectations can affect demand. What is Keynes' theory with regard to the relationship between investment in bonds and money?

As you have already learned, bonds are used to finance specific projects or operations of the issuer. Through these bonds, the issuer is obligated to make payments on the bond in the future. But what determines the bond's price, and what determines the interest paid?

Along with bonds, some investors may consider investing in foreign currency. While doing so, there are a few determinants of what rate currencies will be exchanged. What are these?

This reference will provide you with detailed information on the different bonds and bond issuers. Pay close attention to those issued by corporations. When and why would a corporation issue bonds with covenants?

Here, you will learn more about the different types of bonds, from zero-coupon bonds to Yankee bonds. What is the relationship between bonds and interest rates?

Watch this as you work through the unit and prepare to take the final exam.

We also recommend that you review this Study Guide before taking the Unit 3 Assessment.

Here you will learn about the different stock market transactions, including private placement and IPOs. You will also learn about stock repurchase. Do you know the difference between FINRA and the SEC?

This highlights where securities are traded. You will learn more about the role of broker and dealer markets. You will also come to learn how these different markets are regulated. What are the different markets where securities are traded? What are the differences between each market?

There are generally two theories to assist pricing. The Efficient Market Hypothesis (EFM) and the Behavioural Finance Theory. Understanding the limitations of each of the theories is critical. Read the three concepts on this page to have a comprehensive understanding of EFM. What are the limitations of the EMH?

Having understood what EFM is and its limitations, here you will learn about Behavioural Finance Theory and its role in investment decisions. What are the main effects of Behavioural Finance Theory on investors' decisions?

Watch this as you work through the unit and prepare to take the final exam.

We also recommend that you review this Study Guide before taking the Unit 4 Assessment.

Hedge funds are known as institutional investors. They, along with mutual funds, pension funds, insurance companies, commercial banks, and endowment funds, invest on behalf of other individuals/investors by buying and selling big chunks of debt and equity instruments. Here, you will learn about the history of hedge funds and its key features. What are the different types of hedge funds?

Hedge funds operate using global macro strategies, directional strategies, event-driven strategies, relative-value arbitrage strategies, long/short strategies, and capital structure strategies. As you read, observe how and why fund managers choose one of these strategies to base their investment decisions on. What is the relationship between risk-adjusted performance and investment decisions?

Private equity firms were an alternative source of financing for companies looking to increase their capital without being subject to the scrutiny of enlisting at a stock exchange. This reference provides a guide to understanding how private equity works. What is the difference between hedge funds and private equities?

Investment funds deploy different investment strategies that ensure the generation of maximum profit for investors. Among these strategies is one known as Strategic Investment. Here, you will learn more about strategic investment and come to understand how an investment fund may deploy such a strategy. How would you describe the key advantages of strategic investment?

Along with strategic investment, investment funds may opt for what is referred to as a momentum investment strategy. Here you will understand the key attributes of momentum investing. Can you name the difference between momentum investment and strategic investment?

After understanding the difference between momentum investing and strategic investment, investment funds may opt for strategies known as value investing and growth investing. Here you will learn the difference between the two and, as a result, will be able to form a broader picture about the different investment strategies. How do you choose the best investment strategy?

Watch this as you work through the unit and prepare to take the final exam.

We also recommend that you review this Study Guide before taking the Unit 5 Assessment.

This reference explains one of the causes of financial crises, currency crises, and how fiscal policies play an important role in determining economic outcomes. What are some possible causes of a currency crisis?

This page discusses what banking crises are, how they occur, and their effects on the economy. A banking crisis, much like a currency crisis or a national/foreign debt crisis, can cause a larger financial crisis. What are some possible causes of a banking crisis? What was the cause of the 2008 crisis?

Although recession and financial crisis could seem to be the same, they are different. What is a double-dip recession?

One of the main reasons behind the 2008 meltdown was what is referred to as moral hazard. The financial institutions behave in a reckless manner without safeguarding investors' interests. This pauses the problem of asymmetry of information which is crucial for both investors and insurers whose funds are used to fund these financial activities. This section discusses moral hazard and how it could be mitigated. What is the role of financial intermediaries in reducing moral hazard, and what advantages do these institutions have over individuals?

Banks, financial institutions, and even big corporations that have their weight in the national economy may sometimes be subjected to adversities that require them to make tough decisions to maintain their viability. However, at times, this proves challenging with no way out. In such cases, and given the positive contribution that these corporations or institutions have had on the economy and since they are considered as one of the key players whose demise may lead to national economic or financial crisis, countries opt for rescuing them through specially designed packages. Here, you will learn more about the "too big to fail" notion within the banking sector and when countries rescue banks. What are the criteria drawn by the United States to rescue struggling banks? Is any bank eligible for rescuing?

This will help you further understand how financial crises lead to economic recession and examine this notion from a global perspective by further examining the 2008 financial crisis. What is a depression in the context of financial markets?

Reading this will provide you with a good background on how the financial meltdown of 2008 happened and the effects it had on the financial markets. You will come to learn how the shift in regulations started to shape. What role did credit rating agencies play in the financial crisis of 2008?

This explains what Bank Capitalisation is from a regulatory perspective. You will come to learn about Tier I and Tier II capital. This refers to the amount of capital a bank is required to hold. The amount of capital a bank is required to hold is determined by regulation. What are the determinists of bank capitalization?

This article discusses the effects of the COVID-19 pandemic on financial markets. How does this compare to the financial crisis of 2008?

Watch this as you work through the unit and prepare to take the final exam.

We also recommend that you review this Study Guide before taking the Unit 6 Assessment.

This section gives a detailed perspective into the evolution of monetary standards and how the value of money is determined. You will learn how the value of money was determined by gold and how the value of money became independent of gold. The Bretton Woods agreement led to the establishment of the IMF and the World Bank. What effects did the Bretton Woods agreement have on currencies?

This paper discusses how currency exchange rates are determined. Why might states opt to control their exchange rates?

Here, you will build on your primary knowledge of the different currency exchange rates and learn more about floating currencies and pegged currencies. What is the difference between a soft-pegged and a hard-pegged currency? What does "dollarization" mean?

This section discusses currency exchange, exchange rates, and how currency exchange rates are determined based on the direct and indirect currency quotes (also known as the US and European terms, respectively). It also discusses spot rates, forward rates, and cross rates. Why might companies use these tools?

When talking about trading with currencies, it is important to understand what spot rates, forward rates, and cross rates are. Spot rates refer to the rate of the currencies now (the minute when you decide to make the exchange). If you want to make the exchange at a future date but with the current rate, you may opt for forward rates. Cross rates are used to compare the value of a pair of currencies against another major currency. In this article, you will learn to differentiate between spot rates, forward rates, and cross rates. As you read, see if you can identify what the bootstrap method is.

This page discusses how to calculate currency exchange rates and exchange rates. An exchange rate is the value of a state's currency's value compared to another state's. In addition to the rates we examined previously, there are other exchange rates, known as the onshore and offshore rates. An onshore rate favors the national currency traded within its borders. In contrast, an offshore rate is slightly higher for national currency traded outside the state's borders. What is the relationship between restricted currency and the offshore exchange rate?

This section discusses how to calculate spot rates, forward rates, cross rates, and rates of return, along with other key rates in foreign exchange markets. What are the components of the rate of return on a foreign deposit?

Watch this as you work through the unit and prepare to take the final exam.

We also recommend that you review this Study Guide before taking the Unit 7 Assessment.

Members of the European Union may not necessarily be the same as the Eurozone member states. What are the economic and financial benefits of being part of the EU?

While going through this reference, focus on the EU. It will provide you with a historical perspective of the EU and a future outlook of the EU as a trading bloc. In addition, it will be beneficial to read about other trade agreements as it will provide you with more details on the different forms of economic integration. Which is more beneficial for states, lax economic integrations or more comprehensive ones?

This article explains the different governing institutions of the European Union. What is the difference between the EU and the Eurozone?

For states wishing to join the European Union (EU), there are some conditions they are required to meet. Upon meeting these conditions, prospective member states will be able to benefit from a range of economic and financial benefits, among other benefits. Here you will learn more about the conditions of joining the EU. Is being in the EU financially and economically beneficial?

This page elaborates on the monetary union in the EU and compares it to that of the US. Monetary unions have an effect on monetary policies. What are these effects?

This reference lists some of the benefits of adopting a single European currency. Remember that the Eurozone and the European Union (EU) are different, as are their membership criteria. The eurozone refers to states that use the single currency (Euro). In contrast, the European Union is the political, financial, and economic integration of member states that may not necessarily use the Euro as their currency. The European Economic Area, on the other hand, is an economic integration of its member states who may not be members of the EU or use a single currency. Which one of these forms of integration do you think would be more beneficial for a given state?

Like any other union, for states to be able to use the Euro as their currency, there are some prerequisites these states need to meet, and states are evaluated as to whether their membership will cause economic risks for the state or the euro bloc.

Knowing the cause of the Eurozone debt crisis will help you understand the economic and financial challenges that the Eurozone faces. This resource explores the role of the single currency in crises. Do you think a monetary union is financially advantageous?

As a result of Brexit, the UK is expected to lose many of its privileges of being part of the EU. One of those is financial privileges that include passporting (which is a system that enables banks and financial services providers authorized in any EU or EEA state to trade freely in other EU or EEA member states with minimal additional authorization). It will have an effect on UK-based financial services. How would Brexit affect the financial services in the UK?

Reading this will help you gain an in-depth understanding of how and why Brexit happened. It also outlines the perceived economic and financial effects of Brexit. How do you think Brexit affected international finance?

Joining the EU is said to provide member states with a list of advantages. These will include membership at the different European financial institutions. Generally, there are several European Financial Institutions. The European Central Bank (ECB) maintains the Euro's purchasing power and price stability. The European Investment Bank (EIB) raises funds for capital projects to the EU's objectives. The European Investment Fund (EIF) handles venture capital and serves as the guarantee agency of the EU. Reading this reference will help you understand some of the benefits of joining the EU. How would member states be affected if they decided to leave the union?

The European Financial Sector has experienced many challenges, like the Eurozone Sovereign Debt Crisis and, most recently, Brexit. Here, you will learn more about the challenges of the European capital markets. What are some of the financial challenges the EU faced upon the UK's departure?

One of the advantages of being in the European single market is joining a single banking union. This means there will be a Single Resolution Mechanism and a Single Supervisory Mechanism. You will learn more about the European Banking Union and its elements here. How do you think the single banking union could help prevent a spillover effect of a crisis in member states?

Watch this as you work through the unit and prepare to take the final exam.

We also recommend that you review this Study Guide before taking the Unit 8 Assessment.

The Black Scholes formula, also known as the Black-Scholes-Merton (BSM), is a call option formula for pricing options contracts. It is one of the most important concepts in financial theory. Why is this important?

One derivative contract is a forward contract, where parties agree to trade assets at a future date at a specified price. Both forward and futures contracts are similar in terms of their nature. However, future contracts are standardized agreements, unlike forward contracts. These videos (along with the attached slides) discuss financial futures contacts in detail, including how to calculate payoffs. What are some other differences between forward contracts and futures contracts, and what determines forward and futures prices?

Interest rate swaps (IRS) are agreements to exchange interest payment streams with one another over a specified period. The commonly traded IRS are vanilla swaps, where the exchange is between fixed-rate payments and floating-rate payments based on the London Inter-Bank Offered Rate (LIBOR). Why would investors opt to invest in interest rate swaps?

Here, you will learn more about currency exchange swaps, the terms of this contract, and how they are calculated. Why would investors opt for currency swaps?

Watch this as you work through the unit and prepare to take the final exam.

We also recommend that you review this Study Guide before taking the Unit 9 Assessment.

Anti-money-laundering (AML) laws and Know Your Customer (KYC) play an important role in financial institutions' operations. Implementing these has an effect on financial institutions' provision of services. Here you will understand how these affect financial institutions. What are some of the measures financial institutions take to combat money laundering?

Although the Euro was not designed in a way to allow countries to seize using the common currency by way of reversal to an old currency or by adoption of a new one, there have been instances where this farfetched option was considered, particularly in the wake of the Greek crisis. Do you think leaving the Eurozone is advantageous?

Among the many advantages of being part of the European single market, the European project faces many difficulties and challenges. In this article, you will understand more about these challenges. What is the most prominent challenge facing the European Single Market?

This paper discusses the fiscal policy and fiscal discipline in the EU. Which approach do you think the EU is moving to?

Cryptocurrencies and blockchain technology are some of the means of how technology is entering the financial world. As technology advances, so does the financial products and the provision of these products and services. After watching this video and going through the attached slides, you will learn more about how technology is shaping the world of finance. Is the emergence of multiple non-central bank-backed cryptocurrencies threatening traditional central bank-backed currencies?

Here, you will learn more about Islamic Finance and how it can contribute to financial services. What do you think the next innovative financial product or service after Islamic financing and cryptocurrencies will be?

Watch this as you prepare to take the final exam.

Watch this as you prepare to take the final exam.