AØKA08223U Economics of Exchanges Rates (former International Finance) (F)

After completion of the course, students should be able to

• describe how the foreign exchange market is organized and how trades take place in the market;

• describe the institutional features of the foreign exchange market products (spot and forward contracts) and be able to distinguish between speculation and arbitrage;

• describe and explain Covered Interest Rate Parity (CIP), Uncovered Interest Rate Parity (UIP), and Purchasing Power Parity (PPP) and be able to summarize the empirical evidence on these parity conditions;

• describe the main models of exchange rate determination (the Monetary approach to the exchange rate, Dornbusch overshooting model, the portfolio balance model and Lucas asset pricing model) and use these models to analyze the effects of monetary and fiscal policy on the exchange rate, and summarize the empirical evidence on these models;

• describe and use Mundell-Fleming models to analyze the effects of economic policy under both flexible and fixed exchange rates;

• describe the types of risks that foreign exchange traders face and how these can be managed;

• describe and use microstructure based models to analyze price determination on the foreign exchange market and summarize the empirical evidence on these models;

• describe and explain how macro data releases affect exchange rates and summarize the empirical evidence;

• describe the channels by which central bank intervention can affect the exchange rate and summarize the empirical evidence on these channels;

• continue to undertake further study of international finance with a high degree of autonomy.

The course provides students with competences that relate primarily to international financial management and international economic policy. For example how a financial manager or policymaker should use his/her knowledge of international financial markets to address questions such as: How are exchange rates determined and how do economic policies affect exchange rates? Are central bank interventions effective? How are macroeconomic news affecting the price of foreign exchange? How can exchange rate risks be handled? Are investment strategies such as carry trade profitable?

The grade will be determined on how students accomplish the learning objectives. In order to obtain the highest grade, the performance with respect to the learning objectives must be exceptional for a master student (creative, thorough, well-reasoned, well-argued, insightful, well-written, clear and methodologically sound) and it must show clear recognition, incisive understanding, and mastery of all topics introduced in class.

For pass, the performance with respect to the learning objectives must occasionally be creative, original, thorough, well-reasoned, well-argued, insightful, well-written, clear, and methodologically sound and should show some signs of recognition, understanding of salient issues, adequate reasoning, and an ability to draw relevant comparisons but numerous errors, inconsistencies, or other problems are present.