FINS3616 International Business Finance

How FINS3616 is assessed

What FINS3616 covers

FINS3616 builds from the multinational corporation and exchange-rate determination through the FX market and the parity conditions, then moves into currency derivatives, exposure management, the international monetary system, and finally international financing, cost of capital and cross-border capital budgeting.

Weeks 1–4 feed the 35% mid-term quiz, the FACTSET iLab project applies PPP and regression to real currency data, and the 40% final exam draws on all ten weeks with extra weight on Weeks 5 and 7–10.

Over ten teaching weeks it takes the multinational corporation (MNC) as the unit of analysis and works outward: exchange-rate determination and the mechanics of the foreign-exchange market (Weeks 1–2), the four parity conditions that tie inflation, interest rates, spot and forward rates together — purchasing power parity, the Fisher and International Fisher effects, and interest rate parity (Weeks 2–3), currency futures, options and swaps (Week 4), the international monetary system and the management of transaction and economic exposure (Week 5), then international financing and the Euromarkets, country risk, cost of capital and cross-border capital budgeting, FDI and the internal capital market of the MNC (Weeks 7–10).

It is a calculation-and-concept course: marks come from setting up a parity or hedging formula with the right quote convention and units, working the arithmetic, and interpreting the result.

Assessment runs through Moodle as three weighted components — a 35% closed-book mid-term Inspera quiz on Weeks 1–4, a 25% individual FACTSET regression/PPP iLab project, and a 40% on-campus invigilated final exam via Inspera in the UNSW Term 2 end-of-term examination period that covers all ten weeks with heaviest weight on Weeks 5 and 7–10 (the three weighted components already total 100%; tutorial attendance is recorded but not separately weighted).

No component carries a published pass-mark hurdle. Your FINS3616 result feeds the Weighted Average Mark (WAM) that later finance courses build on; confirm the exact exam date, room and permitted materials on Moodle and the UNSW Examinations Timetable.

Worked example · free

Covered interest rate parity: pricing a one-year forward and reading the premium

Key terms

Multinational corporation (MNC)

A firm that produces and sells goods or services in more than one country — typically a parent plus foreign subsidiaries — managed as an integrated whole. Its objective is to maximise shareholder wealth, and its cross-border cash flows expose it to exchange-rate risk.

Purchasing power parity (PPP)

The parity condition linking expected inflation differentials to expected exchange-rate changes. Absolute PPP sets e₀ = P_home/P_foreign (law of one price); relative PPP projects e_t = e₀·[(1+i_h)/(1+i_f)]^t, so the higher-inflation currency depreciates.

Interest rate parity (IRP)

The no-arbitrage link between the interest differential and the forward premium/discount: f₁ = e₀·(1+r_h)/(1+r_f), with the approximation (f₁−e₀)/e₀ ≈ r_h − r_f. The lower-interest-rate currency sells forward at a premium.

Covered interest arbitrage

The trade that enforces IRP: if the covered interest differential is non-zero, borrow in the low-effective-cost currency, convert at spot, invest abroad, and sell the proceeds forward to lock a riskless profit. The flows push spot and forward rates back to parity.

Transaction exposure

The risk that the home-currency value of a known, contractual foreign-currency cash flow (a receivable or payable) changes between contract and settlement. Managed with forward, money-market, option and swap hedges, and with internal netting/leading-and-lagging.

Currency swap

An OTC agreement in which two parties exchange principal and interest in one currency for principal and interest in another. Unlike an interest-rate swap the principal IS exchanged — at the start (spot) and re-exchanged at maturity — making it a tool for long-dated currency exposure.

FINS3616 FAQ

Questions students ask in each FINS3616 chapter

Why isn't a 15% depreciation of one currency the same as a 15% appreciation of the other?

Because the two percentages are computed on different bases. A depreciation is measured on the falling currency's price; the matching appreciation is measured on the other currency's (now different) price. Flip the quote and recompute, and you get d/(1−d) rather than d. This asymmetry is the most heavily tested numerical idea in Weeks 1–3, so it recurs in the mid-term MCQs with the naive equal-and-opposite value planted as a distractor. Chapter 01 · MNCs and Exchange Rate Determination

How do I compute a cross rate with bid-ask quotes without inverting a leg?

Write both quotes in the same 'currency per US dollar' form, then divide so the dollars cancel: baht-per-krona = (baht/$) ÷ (krona/$). For the bid side of the cross take the numerator's bid over the denominator's ask; for the ask side take the numerator's ask over the denominator's bid. The rule 'go through the worse side of each leg' is what widens the cross spread — you pay a bid-ask cost twice. Chapter 02 · The Foreign Exchange Market

What is the difference between absolute and relative PPP?

Absolute PPP is a level statement — it says what the exchange rate should be right now: e₀ = P_home/P_foreign, so identical goods cost the same everywhere in a common currency. Relative PPP is a change statement — it says how the exchange rate should move: e_t = e₀ × [(1+i_h)/(1+i_f)]^t, so the currency of the higher-inflation country depreciates. Absolute PPP fails badly in the data because of shipping, tariffs and non-traded goods, but relative PPP holds reasonably as a long-run tendency. Chapter 03 · Purchasing Power Parity and Inflation

How do I know which currency to borrow in a covered-interest-arbitrage problem?

Compute the covered return on the foreign leg, (1 + r_f) × f/e₀, and compare it to the home gross return (1 + r_h). If the covered foreign return is higher, borrow home and invest foreign (covered by selling the proceeds forward); if it is lower, do the reverse. If the two are equal, covered interest rate parity holds and there is no arbitrage. That one comparison drives the whole money loop, so do it first. Chapter 04 · The Fisher Effect and Interest Rate Parity

When should a firm hedge with an option rather than a forward?

Use an option when the exposure is contingent or uncertain, or when you want to keep the upside. A forward locks a single rate and removes both the downside and the upside; an option pays a premium to cap the bad outcome while leaving the good outcome open. An importer with a payable buys a call to cap the purchase cost; an exporter with a receivable buys a put to floor the proceeds. If the exposure is certain and you just want it gone at the lowest cost, a forward is usually cheaper because there is no premium. Chapter 05 · Currency Futures and Options

How is a swap gain created out of comparative advantage?

One firm has a bigger cost advantage in the fixed market and the other in the floating market (or a smaller disadvantage there). Each borrows where its relative advantage is largest, then swaps into the exposure it actually wants. The total gain to share is the quality spread differential — the difference between the two firms' credit-spread differentials — so you compute 'fixed-market gap minus floating-market gap'. If that is positive, both firms can end up paying less than they would borrowing directly; if it is zero, no swap gain exists. Chapter 06 · Interest-Rate and Currency Swaps

What is the impossible trinity and why does it matter?

It is the constraint that a country can hold at most two of three things at once: a fixed exchange rate, free capital mobility, and an independent monetary policy. It matters because it explains regime choice and crisis vulnerability: a country that fixes its rate and keeps its capital account open cannot also set interest rates freely, so a shock that calls for easing can force it to choose between abandoning the peg, closing the capital account, or importing the anchor country's policy. Most Week-5 monetary-system questions are really trilemma questions in disguise. Chapter 07 · The International Monetary System

For a payable, do I invest or borrow in the money-market hedge?

You invest. A payable means you will need foreign currency later, so you buy just enough foreign currency today and invest it at the foreign interest rate so it grows to exactly the amount owed at settlement — that locks the cost now. For a receivable it is the mirror image: you will receive foreign currency later, so you borrow its present value today, convert to home currency now, and repay the foreign-currency loan with the incoming funds. Mixing up invest-versus-borrow is the most common money-market-hedge error. Chapter 08 · Managing Transaction Exposure

What is the difference between transaction and economic (operating) exposure?

Transaction exposure is short-horizon and contractual: it is the risk to the home-currency value of a specific, known foreign-currency receivable or payable between now and settlement, and you hedge it with a forward, money-market or option hedge. Economic (operating) exposure is long-horizon and strategic: it is the risk to the present value of all future operating cash flows from unexpected real exchange-rate moves, driven by the currency mix of revenues versus costs and by competitive effects on prices and volumes. You manage it operationally — diversifying production, sourcing and financing — not with a single contract. Chapter 09 · Economic and Operating Exposure

What is the difference between a Eurobond and a foreign bond?

It is about where the bond is sold relative to its currency. A Eurobond is denominated in one currency but sold outside that currency's home country — for example a US-dollar bond sold to investors across Europe and Asia — and it is typically bearer form and lightly regulated. A foreign bond is sold inside a single domestic market, in that market's currency, by a foreign borrower, and it is regulated by the host country (Yankee bonds in the US, Samurai in Japan, Bulldog in the UK). The 'Euro' prefix means offshore, not the euro currency. Chapter 10 · International Financing and the Euromarkets

How does country risk enter a project valuation?

Two ways, and the exam likes you to know both. The quick approach adds a country-risk premium — often proxied by the country's sovereign yield spread over a safe benchmark — to the discount rate, so a riskier country gets a higher rate and a lower present value. The more precise approach leaves the discount rate at the business-risk level and instead adjusts the expected cash flows and their probabilities, or buys political-risk insurance, so that a specific event such as expropriation or blocked funds is priced directly. The premium method is blunt because it penalises every future cash flow uniformly and compounds. Chapter 11 · Country Risk Analysis

Why value a foreign project from the parent's perspective rather than the subsidiary's?

Because only cash that reaches the parent creates value for its shareholders. A subsidiary can look highly profitable locally, but if blocked funds, remittance restrictions or withholding taxes stop the cash from being repatriated, that profit does not benefit the parent. So you build the NPV on the incremental after-tax cash flows the parent can actually receive, adjusting for transfer restrictions and inter-affiliate flows. This parent-versus-project distinction is a favourite exam point and often flips a project from apparently positive to negative NPV. Chapter 12 · Cost of Capital and International Capital Budgeting

How does transfer pricing reduce an MNC's global tax bill?

By shifting where profit is booked. If a subsidiary in a low-tax country sells to an affiliate in a high-tax country, raising the internal (transfer) price moves profit into the low-tax jurisdiction and out of the high-tax one, while leaving total group pre-tax profit unchanged. The tax saving equals the profit shifted times the difference in tax rates. The limit is that arm's-length transfer-pricing rules require intra-firm prices to resemble those between unrelated parties, and tax authorities police aggressive shifting, so the technique is bounded — and it is also used to move otherwise blocked funds out of a country. Chapter 13 · FDI and Managing the Internal Capital Markets

How to study for the exam

Treat FINS3616 as a small set of reusable engines rather than ten separate topics, and rehearse them weekly rather than cramming before the end-of-term exam.

First, lock the FX-market plumbing: the direct/indirect quote convention, the bid-ask rule (buy at the ask, sell at the bid), % spread = (ask − bid)/ask, cross rates and the annualised forward premium (F − S)/S × 360/days — these feed everything downstream and are heavily examined in the 35% mid-term.

Second, build one mental map of the four parity conditions (PPP ↔ inflation, Fisher ↔ real vs nominal rates, IFE ↔ expected spot change, IRP ↔ forward premium) and practise each as both an exact formula and its intuitive approximation, always stating which currency should appreciate or depreciate and why.

Drill the reciprocal-flip asymmetry (if A depreciates d, B appreciates d/(1−d)) until it is automatic — it is the single most-tested numerical idea in Weeks 1–3. Third, for Week 4 onward, rehearse the money-loops (covered interest arbitrage, triangular arbitrage) and the hedging comparison (forward vs money-market vs option) as step-by-step procedures with a units check at every line.

For the iLab, practise the forward-looking exchange-rate change and the PPP long-versus-short-horizon reading on invented data — but remember AI is prohibited on that component.

The mid-term allows one single-sided A4 formula sheet, so build it early; the final's book status and permitted materials are set by the course, so confirm them on Moodle and the UNSW Examinations Timetable rather than assuming they match the mid-term's.

When a step won't click, ask Sia to explain that single step a different way and set you a fresh practice question in the same style; it teaches the method and checks your reasoning, and it never substitutes for your own graded work. Confirm the exam date, room, weighting and permitted materials on Moodle and the UNSW Examinations Timetable.

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