FINM8007 International Finance

How FINM8007 is assessed

The three tasks total 100%. Each quiz is redeemable against the final exam, so it counts for either 0% or 10% of the grade, whichever is better for you, and there are no alternate quiz sittings. No assessment is accepted after its due date. The final exam is centrally timetabled, and the only permitted materials are a scientific non-programmable calculator that is not a financial calculator, a pen and a ruler.

What FINM8007 covers

Eleven chapters follow the Semester 2 2026 lectures: the foreign exchange market, the monetary system and the balance of payments first, then rate determination, parity, forecasting and arbitrage, then currency exposure and hedging, and finally investment, banking, bonds and equity.

It starts where every international transaction starts, with the foreign exchange market: who trades in it, how quotes are written and how a cross rate is built from two dollar quotes with bid and ask prices.

It then sets the market in its history, from bimetallism and the gold standard through Bretton Woods to today’s mix of floating and pegged regimes, and in its accounts, the balance of payments.

From exchange rates to the multinational firm

The middle of the course explains what moves exchange rates.

Demand and supply respond to inflation, interest rates, income, government controls and expectations, and central banks intervene directly, indirectly or through capital controls. The parity conditions tie spot rates, forward rates, interest rates and inflation together, and forecasting, speculation and arbitrage show what happens when markets drift from them.

The second half turns to the firm: identifying and measuring transaction, economic, translation and contingent exposure, hedging it with forwards, money market positions, options or operating choices, and financing and investing abroad through foreign direct investment, international banks, bonds and equity.

What the assessment rewards

Most of the grade sits in a closed-book final exam that mixes multiple-choice, short-answer calculation and short-answer written questions, so the guide pairs every method with a worked example whose numbers you can check by hand and a sentence that explains what the number means.

Each chapter ends with practice items modelled on the quiz formats.

Worked example · free

Compare a forward hedge with a put option on a US-dollar receivable

Key terms

Direct Quote

The price of a foreign currency stated in units of the home currency.

Cross Rate

An exchange rate between two currencies built from each one’s rate against a third, usually the US dollar.

Bid-Ask Spread

The gap between the price at which a dealer buys a currency and the higher price at which it sells it.

Impossible Trinity

The rule that a country cannot have a stable exchange rate, free capital movement and an independent monetary policy all at once.

Balance of Payments

A double-entry record of all economic transactions between a country’s residents and foreign residents over a period.

Sterilised Intervention

Foreign exchange intervention offset by an opposite trade in government securities, so the money supply does not change.

Purchasing Power Parity

The proposition that exchange rates adjust to offset differences in price levels or inflation between countries.

Interest Rate Parity

The condition that the forward premium or discount on a currency offsets the interest rate gap between two countries.

Covered Interest Arbitrage

Borrowing in one currency, investing in another and locking the conversion back with a forward to earn a riskless profit.

Transaction Exposure

The risk that settled values of contracts already made in a foreign currency change with the exchange rate.

Value at Risk

The largest loss expected over a given horizon at a stated confidence level under normal market conditions.

Money Market Hedge

A hedge built from borrowing and lending in two currencies that fixes the home-currency value of a future foreign cash flow.

Eurobond

A bond sold to investors in several countries in a currency other than that of the countries where it is sold.

FINM8007 FAQ

Questions students ask in each FINM8007 chapter

How do I tell a direct quote from an indirect one?

Ask which country is home. A direct quote prices one unit of a foreign currency in home units, so the home currency is the price currency; an indirect quote prices one unit of the home currency in foreign units. The same quote can be direct in one country and indirect in another. Chapter 01 · Foreign Exchange Markets and Quotations

Why did the Bretton Woods system break down?

Growing world trade needed more dollars, which the United States supplied through persistent deficits. Foreign dollar holdings came to exceed US gold, confidence fell, the costs of the Vietnam War added pressure, and in August 1971 the dollar’s convertibility into gold was ended. Chapter 02 · The International Monetary System

Is buying foreign shares a current account item?

No. Purchases of foreign shares or bonds are portfolio investment and belong in the capital and financial account. The current account records trade in goods and services, income such as dividends and interest, and current transfers. Chapter 03 · The Balance of Payments

Why does higher US inflation make the pound rise?

British goods become cheaper relative to American ones, so Americans buy more of them and demand more pounds, while the British buy fewer American goods and supply fewer pounds. Both shifts push the dollar price of the pound up. Chapter 04 · Exchange Rate Determination and Intervention

Why does PPP hold better in high-inflation countries?

With high inflation, price gaps across borders open quickly and are large, so cross-border price arbitrage pays well and prices return to parity faster. Over short horizons in low-inflation economies, trade costs, non-tradable services and quality differences dominate. Chapter 05 · International Parity Conditions

Can fundamental models beat a random walk?

On the evidence the lecture summarises, econometric models of fundamentals forecast no better than a random walk or the forward rate. Any relationship that holds reliably is soon discovered by others, and prices then adjust to remove it. Chapter 06 · FX Forecasting, Speculation and Arbitrage

Can a purely domestic firm have currency exposure?

Yes, economic exposure. A firm that buys and sells only at home can still lose sales when an importing rival’s currency weakens and its goods become cheaper, even though none of the firm’s own contracts is in a foreign currency. Chapter 07 · Identifying and Measuring Foreign Exchange Exposure

When do forward and money market hedges give the same result?

Exactly when interest rate parity holds. Equating the forward proceeds with the money market proceeds reproduces the parity formula, so any difference between the two hedges measures how far the quoted forward sits from its parity value. Chapter 08 · Managing Foreign Exchange Risk

When is a cross-border acquisition better than a greenfield plant?

When speed and access to proprietary assets such as brands, licences or distribution matter most. Against that, acquisitions are politically sensitive because many countries prefer local control of domestic firms, and they face regulatory and geopolitical uncertainty. Chapter 09 · International Corporate Investment and Financing

Does a Eurocurrency deposit have to be in Europe?

No. The prefix only means the deposit is in a currency other than that of the country where the bank sits, so a yen deposit in Singapore is a euroyen deposit and a dollar deposit in London is a eurodollar deposit. Chapter 10 · International Banking and Money Markets

What separates a Eurobond from a foreign bond?

A foreign bond is sold in one foreign market, in that market’s currency and under its rules, such as a Yankee bond in the United States. A Eurobond is sold across several markets in a currency foreign to them, usually under loose regulation. Chapter 11 · International Bond and Equity Markets

How to study for the exam

Build the course in the order it was taught, because each topic reuses the last. Start by making quotes automatic: for any pair, say which currency is the base, convert to the reciprocal, and build a two-way cross rate using the side that favours the dealer.

Then learn each parity condition as three things, a sentence, a formula and a direction, and practise the covered arbitrage routine until you can state the profit and the four market pressures that close it. For the second half, classify every case before calculating: name the exposure, measure it, then compare the hedges in home currency at the same date and state your criterion.

In the last fortnight, sit timed sets that mix multiple-choice items with calculation and written questions, use only your permitted calculator, and write a one-sentence interpretation under every number you compute. Keep a single page of the formulas from the exam-morning review and rewrite it from memory each week, since no formula sheet is provided.

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