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Finance 663: International Finance
Fuqua Spring Term I, 2017 |
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Course Description
International Finance will share an investment finance and a corporate finance perspective. Students will learn key aspects of international corporate finance (evaluation of investments, hedging, dealing with political risk). Students will also learn about the issues facing portfolio investors in equities, bonds, and commodities. Students will learn how to evaluate potential corporate and portfolio investments as well as how to measure and manage risk exposures. Course should be taken by any student specializing in either Corporate Finance or Investment Finance. This is an advanced course and resembles a course that could be called "Topics in International Finance" because of the emphasis on current events.
As such there are two distinct tracks, International Investment Finance [IIF] and International Corporate Finance [ICF]. The deliverables in the course are bifurcated. However, both tracks are expected to attend all classes.
The Fuqua Honor Code is maintained in this course.
Students are expected to invest a significant amount time in the final project. Students are also expected to be completely up to date with the latest financial and geopolitical news.
The course counts towards either of investment or corporate finance concentrations offered by Fuqua.
Who Am I?
To get to know me, go to my homepage and follow some of the links, for example my Media page or my most recent research papers.
In addition to my job at Duke University, I am Investment Strategy Advisor to the Man Group, PLC. The Man Group is the largest listed hedge fund group in the world.
Prerequisites
All students must have completed either the Investment or the Corporate Finance course.
Class Schedule
We meet Tuesdays and Fridays at 9:00am.
Attendance
I do not formally keep track of attendance. Two important points: 1) Attendance is crucial for your performance on the final assignment and 2) you are not allowed to ask questions in the second half of the class if you miss the first half.
Deliverables
There are three deliverables. Two deliverables are done by groups and the third is individual. The group size should be at maximum four people. Organize these groups sooner rather than later. I will be sending an invitation to a Google spreadsheet that will you will use to form groups. Ideally, the groups are formed before the first class. There is a fourth aspect to the course which is not a hard-copy deliverable. I will be assigning groups to mini-debates. One group will be advocating a risk as important and another group will be arguing that it is not that important. No Powerpoint or scripts allowed. You can have talking points, that's it. For example, The Collapse of Italian Banks is a Systemic Risk for the Eurozone.
1. Portfolio
On the day after the first lecture, each group needs to turn in a discretionary portfolio. The portfolio should posted to the class Google sheet. The initial value of the portfolio is $100 million. It can include anything as long as the price is on Bloomberg or whatever source you have access to. The portfolio must have international content. For the initial prices, you can paste screen shots of the prices (and times) into a worksheet for your group in the class Google sheet..
I recommend that you have 4-6 positions in the portfolio. There is no optimization necessary. The portfolio (by construction) will not be fully diversified.
You can trade as much as you want. However, for trades, you need to keep a careful record of the trades with a screen shot pasted in the Google sheet.
You will borrow $100 million. This means the notional value of the portfolio is $200 million. The borrowing rate is 7% per annum. If you invest in futures, you naturally get leverage. To simplify, we will assume 100% margin for all futures.
I also require at least one short position. When you short, we assume 100% collateral is required. That is, to initiate a short position the same negative cash flow occurs as if it was a long position.
Trade size cannot be unrealistic. For example, you cannot buy $100 million of asset X if asset X only trades $10 million per day. (You could buy $2.5 million or 25% of the daily volume).
Each trade costs you 10 basis points (each way).
You need to keep daily P&L. I will be asking each class the status of your portfolios. The Google sheet has an example portfolio. You do not have to follow my format (which admittedly is clunky). There is another sheet that links to all groups NAV. Please keep that updated because I will feature it in every class. In addition, for some assets, you should be able to get the sheet to automatically update your positions.
Finally, you are allowed 2:1 leverage (so you initially control $200 million with $100 million in capital, so the net asset value or NAV is $100 million). If the NAV of portfolio falls below $80 million, you will get a "margin call". This means you will need to sell some positions to reduce your borrowing to $80 million. If your NAV goes to $120, I will allow you to borrow another $20 million. To keep things simple, we will reset every 20% move in the NAV. So if your portfolio recovered from $80 to $96 million, you are allowed to borrow another $16 million.
By the last day of class, you need to turn in your portfolio. I need a brief write up (maximum two pages) explaining the logic of your portfolio and an analysis of the returns over the approximately 30 trading days.
This assignment along with the debate is worth 15% of the final grade. The goal of this assignment is to get you to be tracking markets. The grade is not related to the profitability of the portfolio or the number of trades. Indeed, I advise you to limit your trades because you will be busy on the big project. You do not need to "optimize" the portfolio either.
2a. Case Documents for ICF Track
This is the major requirement in this course. This will be 50% of your grade. In most courses, you prepare a case. That is, you analyze a case that has already been written. While we do this too, in addition you will build a case from scratch.
It is critical that you begin work immediately on this project -- and best to start before classes begin. You need to form your groups now and scout out interesting case situations. The case needs to be international.
Since it is unlikely that you can make site visits, you need to make extensive use of the telephone, fax and email. That is, request (insist) that materials are sent from your target firm by express mail, fax, or electronically. In the past, students waited for weeks for materials to arrive by regular mail. Offer to pay for the express mail (ask my assistant, Tara Bowens, for my FEDEX account number). In addition, you can submit to my assistant requests for telephone call reimbursements.
For the corporate finance track student, your case will involve a large scale project evaluation. It is important that you consult with the international students in the class. They might have a number of interesting cases in mind. I highly recommend that you diversify the geographical and language skills of your group.
Some examples of some cases that are focused on emerging markets are found here. You do not have to choose a case based in an emerging market. Most students choose "megaprojects" (there is even a Wikipedia entry for mega projects). However, the project does not have to be large - just interesting. I also consider space projects, like Planetary Resources, Inc. "international".
As soon as possible, I need you to send me the list of the members of your group. Ideally, if you could send me in HTML a replica of the format immediately linked above. The name and description of the case will be missing.
We will do the group presentations in the 12th class.
There should be six documents: (please use consistent file names) I would like both the source files (i.e. Word, Excel, Powerpoint) as well PDFs created for certain key files (see below).
- a one page cover letter that pitches the case, "Note to the Instructor" (i.e. why would this case be useful for MBA students to study), [e.g. Telkom_Letter.docx and Telkom_Letter.pdf]
- the case (make it look good), [e.g. Telkom_Case.docx and Telkom_Case.pdf]
- the solution (or teaching note), [e.g. Telkom_Solution.docx and Telkom_Solution.pdf]
- any supplementary materials (i.e. press clippings, prospectii, recent information on what happened, spreadsheets in Excel) [[e.g. Telkom_Exhibits.xlsx (no PDF necessary for XLS files); Telkom_Press.docx and Telkom_Press.pdf]
- a copy of the Powerpoint presentation that you will use in class and [e.g. Telkom_Presentation.pptx and Telkom_Presentation.pdf]
- an email from each group member detailing the percentage contributions of each member. The contribution should not just reflect the time devoted but the quality of the time. If you fail to send an email, I assume that your vote for the contributions is for equal.
When the materials are ready, copy to my Dropbox (or common folder if I can get OIT to set it up).
All students are expected to attend the presentations. You must email me if you cannot attend the presentations and there needs to be a very substantial reason.
We need to meet as soon as possible. My assistant will coordinate times. It is also possible to more informally meet, say after class, -- just let me know. After your case is decided, I will require a word file with the preliminary description of the case. The file should have a logical name (which will likely by the subdirectory name where your content will reside), for example, Nestle_Overview.docx. The details must include, what you have done so far, and a schedule for completion of the case over the next three weeks. I will also need a short (three or four sentence description and title of the case for the project link page).
The only requirement that I have on content is that the case have international finance content. In particular, in part of the corporate finance case, I would like to see a valuation, i.e. how much is a particular company or project worth. Use detailed financial statement information from Worldscope. Value using discounted cash flows as well as comparables. In the discounted cash flow section, I want an analysis of the cost of capital. You will, in part, use my International Cost of Capital and Risk Calculator.
The case does not have to be historical. It can involve a decision that has not been made yet. Indeed, it can involve a hypothetical decision.
I will promote the cases and you will notice from my CV that five of my students' cases have been published. See for example Telkom South Africa. Here is one that was recently published (in December 2016). When posting, my name will be appended as the final name on the case credits. [In finance, by the way, last name out of alphabetical order indicates the smallest contribution.] I will have more information on this during the term.
2b. Case/Project for IIF Track
This is the major requirement in this course. This will be 50% of your grade. Student groups have a choice of either writing an investment management case or doing a research project.
It is critical that you begin work immediately on this project -- and best to start before classes begin. You need to form your groups now and scout out interesting topics.
If you decide to do a case, please follow the guidelines above for the ICF track. The content of the case will be different because it will involve portfolio management. Here are a few examples of high quality investment management cases:
Most groups will choose a research project.
Some examples of some IIF projects are found here. Interesting data is increasingly available. For example, this site maintained by an Oxford University professor collects annual commodity data over the past 600 years. If you are interested in commodities, this site has great daily data on 98 commodites. It costs only $99 (which I would pay for).
As soon as possible, I need you to fill out your groups in the Google Sheet -- ideally, by the end of the first class.
We will do the group presentations in the 11th and 12th classes.
There should be six documents: (please use consistent file names) I would like both the source files (i.e. Word, Excel, Powerpoint) as well PDFs created for certain key files (see below).
- the write up (make it look good), [e.g. 3rd_Quadrant_Shorts.docx and 3rd_Quadrant_Shorts.pdf]
- a copy of the Powerpoint presentation that you will use in class and [e.g. 3rd_Quadrant_Shorts.pptx and 3rd_Quadrant_Shorts.pdf]
- a guide to your data files, [e.g. 3rd_Quadrant_Shorts_Data_Guide.docx ]
- any supplementary materials [[e.g. 3rd_Quadrant_Shorts_Results.xlsx (no PDF necessary for XLS files);]
- an email from each group member detailing the percentage contributions of each member. The contribution should not just reflect the time devoted but the quality of the time. If you fail to send an email, I assume that your vote for the contributions is for equal.
When the materials are ready, copy to my Dropbox.
All students are expected to attend the presentations. You must email me if you cannot attend the presentations and there needs to be a very substantial reason.
We need to meet as soon as possible. The Google sheet has a calendar. It is also possible to more informally meet, say after class, -- just let me know. After your case is decided, I will require a word file with the preliminary description of the case. The file should have a logical name (which will likely by the subdirectory name where your content will reside), for example, 3rd_Quadrant_Shorts.docx. The details must include, what you have done so far, and a schedule for completion of the case over the next three weeks. I will also need a short (three or four sentence description and title of the research project for the project link page).
One important item for a project like this is the availability of data. You need to work with the Fuqua library to make sure that it is feasible to obtain the data that you need.
The case does not have to be historical. It can involve a decision that has not been made yet. Indeed, it can involve a hypothetical decision.
While I don't publish these projects, they "live" forever on the Internet.
3. Final Assignment
This assignment is worth 35% of your grade. You get this assignment on the day of the 12th lecture and it is due 24 hours later. It consists of four questions. There is an ICF version and a IIF version. Some questions may be the same but some will be different. This is an individual assignment and no collaboration is allowed. The assignment is turned in via a Word document that has 1" margins and 11pt text. The maximum length is two pages. This assignment should not take much time. It is a written assignment (e.g., I am not going to have you calculate hedge ratios). It is also hard to study for. The best preparation is attending and participating in all of the classes.
To preempt the question, yes you can mix it up. You can do a ICF case and select the IIF Final Assignment.
Outside Class Contact
E-mail me at cam.harvey@duke.edu. The Google sheet has a calendar whereby you can grab a time to see me. All groups should schedule a visit. I need to email you to confirm (because I have calendars going for both of my classes). At odd hours, you can text me at 919-271-8156 (if I am not available, I simply turn it to DND, so don't hesitate to text).
Video Clips
I will try to shoot a series of short clips for the course.
Grading
I do all the grading.
Copyrights
I reserve the copyright for all parts of the course. Any commerical reproduction of any course materials including lecture notes taken by students during the class is not allowed unless explicit permission is given by me.
Texts
There are no required texts in Finance 663. However, I do recommend the basic text by Bekaert and Hodrick, International Financial Management. We will not follow the text but it is an important reference, like Brealey, Myers and Allen is for Corporate Finance.Outline and Recommended Reading Assignments
Most of the reading for Finance 663 will come from journal articles, working papers and presentations. All materials will be available to you electronically.
Current Events
For the first part of every lecture, we will talk about current events. You need to keep up. I recommend Financial Times followed by Wall Street Journal. There will be other materials that cannot be posted on the Internet.
Pre-Class Reading
There is no pre-assignment other than getting the groups organized. However, over the winter break, I recommend that you read Niall Ferguson's Civilization: The West and the Rest. In both Investment Management and Corporate Finance, it is very important to have an understanding of history. This book provides a very solid foundation. Niall provides a great overview of the book at his 2011 TED talk. I also recommend Samuel Arbesman's The Half-Life of Facts. Please see the class schedule for more detail.