AØKA08210U International Finance

Volume 2013/2014
MSc in Economics

The aim of this course is to introduce students to the microstructure of the foreign exchange market. The microstructure approach, which differs from the standard macroeconomic approach where exchange rates are explained by macroeconomic relationships, focuses on the behavior of and interaction between market participants, for example dealers, corporations and central banks. In other words, the microstructure literature studies the details and importance of foreign exchange trading as determinants of the price of foreign exchange. In this context we will discuss both theoretical models and the empirical evidence including central bank interventions on the foreign exchange market from both a macroeconomic and a microeconomic perspective.

The course is divided into three modules. In the first module we focus on how the foreign exchange market is organized and the behavior of market participants. Within this module we also discuss the risks associated with holding foreign currency. Topics include instruments such as spot and forward exchange rates, how trades take place in the interbank and the retail segments of the market, exchange rate risk, and carry trade.

The second module focuses on the microstructure of the foreign exchange market. We will discuss models of the foreign exchange market and empirical tests of model predictions. The module also bridges the gap between microstructure and macroeconomic exchange rate models by focusing on releases of macroeconomic news and its effects on the exchange rate. Topics include order flows, transmission of information between dealers and customers, intraday trading, feedback trading, forecasting, and macroeconomic news.

The third module focuses on how central bank interventions can affect exchange rates, a topic analyzed both from a macroeconomic perspective as well as from the microstructure perspective using models discussed in the second module. Topics include sterilized and non-sterilized interventions, public versus secret interventions, channels of influence of interventions, and central bank reaction functions.

Learning Outcome
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 interbank and the retail segments of 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 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 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.


Martin D.D. Evans, Exchange-Rate Dynamics, Princeton University Press, 2011 (Ch. 6-7 and 9-11)

Lucio Sarno and Mark P. Taylor, The Economics of Exchange Rates, Cambridge University Press, 2002 (Ch. 4.1.5, 7 and 9).

Journal articles

Beine, M. and O. Bernal, (2007), "Why Do Central Banks Intervene Secretly? Preliminary Evidence from the BoJ," International Financial Markets, Institutions and Money, 17:291-306.

Bonser-Neal, C. (1996), "Does Central Bank Intervention Stabilize Foreign Exchange Rates?" Federal Reserve Bank of Kansas City Economic Review, 81:43-57.

Cheung, Y-W and M.D. Chinn, (2001), "Currency traders and exchange rate dynamics: A survey of the US market," Journal of International Money and Finance, 20:439-471.

Dominguez, K.M. and J.A. Frankel (1993), "Does Foreign-Exchange Intervention Matter? The Portfolio Effect," American Economic Review, 83:1356-1369.

Evans, M.D.D. and R.K. Lyons, (2003), "Are Different-Currency Assets Imperfect Substitutes?" in Exchange Rate Economics: Where Do We Stand?, Paul De Grauwe (ed.), MIT Press.

Fatum, R. and M. M. Hutchison (2003), "Is Sterilized Foreign Exchange Intervention Effective After All? An Event Study Approach," Economic Journal, 113:390-411.

Total number of pages: 350

Prior to enrolling in this course, students should have taken Corporate Finance and Incentives, International Monetary Economics and Econometrics C. Financial Markets is recommended but not required. The course requires a good grasp of econometrics and mathematics.
3 hours of lectures per week for 14 weeks.
  • Category
  • Hours
  • Exam
  • 3
  • Lectures
  • 42
  • Preparation
  • 161
  • Total
  • 206
7,5 ECTS
Type of assessment
Written examination, 3 hours under invigilation
A 3 hours written assignment taking place at Peter Bangs Vej 36.
Exam registration requirements
One homework assignment has to be completed and approved.
Without aids
Marking scale
7-point grading scale
Censorship form
External censorship
100 % censurship
Exam period
Will be updated before the start of the semester
Same as ordinary. But if only a few students have registered for the re-exam, the exam might change to an oral exams with a synopsis to be handed in. This means that the examination date also will change.
Criteria for exam assesment
The Student must in a satisfactory way demonstrate that he/she has mastered the learning outcome of the course.