Lecture times: Thursday 09H00 (LT1)

1 Course Description

The course provides an introduction to international finance and makes use of financial and open-economy macroeconomic modelling techniques to investigate topics that are relevant to this field of study. After providing an overview of the foreign exchange markets we investigate the properties of exchange rate data. Thereafter, we consider a number of models for exchange rate determination where we make use of various forms of regressions and intertemporal asset pricing models. In addition, we also consider various forms of interest rate parity conditions and the relative efficiency of the foreign exchange market. A discussion on carry-trade models, currency momentum models, and other forms of strategic trade models will also be included. Additional topics include aspects that relate to measuring and managing real exchange risk (where specific attention is directed towards country and political risk factors), the role of purchasing power parity, as well as role of deficits and current account imbalances. When discussing these models, the goal is to provide students with a fundamental understanding of the relevant issues that would allow them to engage with future colleagues in the financial or academic industries.

2 Pre-requisites and Preparation

The course will require familiarity with basic probability and statistics (i.e. random variables, conditional expectations, probability distributions and regression analysis), as well as elementary financial economics (at the level of an introductory finance textbook such as Bodie, Kane and Marcus (2010)). Brief refreshers of all the relevant concepts will be provided in the lectures, however the students are urged to revise all the required background material in their own time. In addition, students are strongly encouraged to read the required readings before each class.

3 Course Texts

The course is based primarily on Bekaert & Hodrick (2012), Gandolfo (2016), Sarno & Taylor (2002), and Fabozzi, Neave & Zhou (2011). These core readings are further supplemented with journal articles and technical manuals. Further details may be found on my website at: https://www.economodel.com/international-finance.

4 Assessment

Assessment consists of a final examination that counts 65% towards the final mark. Students will be required to complete a small project and test that will count a further 35%, where the test will contribute 15% and the project 20% towards your final grade.

5 Course Content

  1. Characteristics of Foreign Exchange Markets: Required readings: Bekaert & Hodrick (2012); & Class Notes Additional readings: Levich (1985) Section 4 and Rime & Schrimpf (2013)

  2. Balance of Payments: Required readings: Class Notes

  3. Statistical Properties of Exchange Rate data Required readings: Bekaert & Hodrick (2012); & Class Notes

  4. Interest Rate Parity: Required readings: Bekaert & Hodrick (2012); & Class Notes

  5. Foreign Exchange Carry Trade Strategies: Required readings: Bekaert & Hodrick (2012); Hodrick (2013) & Rosenberg (2013); & Class Notes Additional readings: Brunnermeier, Nagel & Pedersen (2008); Burnside (2011)

  6. Foreign Exchange Momentum Strategies: Required readings: Menkhoff, Sarno, Schmeling & Schrimpf (2012); & Class Notes Additional readings: Burnside, Eichenbaum & Rebelo (2011)

  7. Purchasing Power Parity & the Real Exchange Rate: Required readings: Bekaert & Hodrick (2012); & Class Notes

  8. Measuring & Managing Real Exchange Risk: Required readings: Bekaert & Hodrick (2012); & Class Notes

  9. Exchange Rate Determination & Forecasting: Required readings: Bekaert & Hodrick (2012); & Class Notes

  10. Country & Political Risk Factors: Required readings: Bekaert & Hodrick (2012); & Class Notes

  11. Optimal Portfolio Allocation: Required readings: Bekaert & Hodrick (2012); Fabozzi, Neave & Zhou (2011); & Class Notes

  12. Capital Asset Pricing Model: Required readings: Bekaert & Hodrick (2012); Fabozzi, Neave & Zhou (2011); & Class Notes

  13. Arbitrage Pricing Theory: Required readings: Bekaert & Hodrick (2012); Fabozzi, Neave & Zhou (2011); & Class Notes

6 References

Bekaert, Geert J. and Robert J. Hodrick. (2012). International Financial Management, Prentice Hall: New York.

Fabozzi, Frank J., Edwin H. Neave & Gaofu Zhou. (2012). Financial Economics, Wiley: New York.

Gandolfo, Giancarlo. (2016). International Finance and Open-Economy Macroeconomics, Springer: Berlin.

Sarno, Lucio and Mark P. Taylor. (2002), The Economics of Exchange Rates, Cambridge University Press: Cambridge.


  1. email: