655. iFi (International Finance)




Campbell R. Harvey
Professor, Fuqua School of Business, Duke University, Durham, NC USA
Research Associate, National Bureau of Economic Research, Cambridge, MA USA
Investment Strategy Advisor, Man Group PLC, London, UK

Spring Term 3, 2014


Course Description

International Finance will share an investment finance and a corporate finance perspective. Student will learn key aspects of international corporate finance (evaluation of investments, hedging, dealing with political risk). Students will also learn about the issues facing portfolio investors in equities, bonds, and commodities. Students will learn how to evaluate potential corporate and portfolio investments as well as how to measure and manage risk exposures. Course should be taken by any student specializing in either Corporate Finance or Investment Finance.

As such there are two distinct tracks, International Investment Finance [IIF] and International Corporate Finance [ICF]. The deliverables in the course are bifurcated. However, both tracks are expected to attend all classes.

The Fuqua Honor Code is maintained in this course.

Students are expected to invest a significant amount time in the final project. Students are also expected to be completely up to date with the latest financial and geopolitical news.

The course counts towards either of investment or corporate finance concentrations offered by Duke University.


Who Am I?

I have not been in the classroom for a while because I have been editing The Journal of Finance (the top academic journal in the field of finance). With 1,500 manuscript submissions per year, there was no way to teach at the same time. I tried to keep in contact with the students with sessions held by the Asset Management Club.

To get to know me, go to my homepage and follow some of the links, for example my Media page or my most recent research papers.

In addition to my job at Duke University, I am Investment Strategy Advisor to the Man Group, PLC. The Man Group is the second largest hedge fund group in the world.


Prerequisites

All students must have completed both the Investment and the Corporate Finance courses. Certain case-by-case exceptions may be considered for second-year students (only in 2014).


Class Schedule

We meet Monday and Thursdays at 10:30am.


Deliverables

There are three deliverables. Two deliverables are done by groups and the third is individual. The group size should be at maximum four people. Organize these groups sooner rather than later.


1. Portfolio

On the day after lecture, each group needs to turn in a discretionary portfolio. The portfolio should be emailed to me at cam.harvey@duke.edu. The initial value of the portfolio is $100 million. It can include anything as long as the price is on Bloomberg. The portfolio must have international content. For the initial prices, email me screen shots (or pictures with your mobile phone) of the prices.

You can trade as much as you want. However, for trades, you need to email me the intention to trade followed by a separate email with the screen shot.

Leverage is allowed so total notional is $200 million. That is, you can borrow another $100 million and total capital is $200 million. The borrowing rate is 7% per annum. If you invest in futures, you naturally get leverage. To simplify, we will assume 50% margin for all futures. That is, if you invest all of your initial capital in futures, you could control $200 million of notional. In this case, you already have the leverage and cannot borrow another $100 million.

You need to keep daily P&L (no screen shots necessary for daily P&L - just trades). I will be asking each class the status of your portfolios.

By the last day of class, you need to turn in your portfolio. I need a brief write up (maximum two pages) explaining the logic of your portfolio and an analysis of the returns over the approximately 30 trading days.

This assignment is worth 15% of the final grade. The goal of this assignment is to get you to be tracking markets. The grade is not related to the profitability of the portfolio or the number of trades. Indeed, I advise you to limit your trades because you will be busy on the big project. You do not need to "optimize" the portfolio either.



2a. Case Documents for ICF Track

This is the major requirement in this course. This will be 65% of your grade. In most courses, you prepare a case. That is, you analyze a case that has already been written. While we do this too, in addition you will build a case from scratch.

It is critical that you begin work immediately on this project -- and best to start before classes begin. You need to form your groups now and scout out interesting case situations. The case needs to be international.

Since it is unlikely that you can make site visits, you need to make extensive use of the telephone, fax and email. That is, request (insist) that materials are sent from your target firm by express mail, fax, or electronically. In the past, students waited for weeks for materials to arrive by regular mail. Offer to pay for the express mail (ask my assistant, Tara Bowens, for my FEDEX account number). In addition, you can submit to my assistant requests for telephone call reimbursements.

For the corporate finance track student, your case will involve a large scale project evaluation. It is important that you consult with the international students in the class. They might have a number of interesting cases in mind. I highly recommend that you diversify the geographical and language skills of your group.

Some examples of some cases that are focused on emerging markets are found here. You do not have to choose a case based in an emerging market. Most students choose "megaprojects" (there is even a Wikipedia entry for mega projects). However, the project does not have to be large - just interesting. I also consider space projects, like Planetary Resources, Inc. "international".

As soon as possible, I need you to send me the list of the members of your group. Ideally, if you could send me in HTML a replica of the format immediately linked above. The name and description of the case will be missing.

We will do the group presentations in the 11th and 12th classes.

There should be six documents: (please use consistent file names) I would like both the source files (i.e. Word, Excel, Powerpoint) as well PDFs created for certain key files (see below).

  1. a one page cover letter that pitches the case, "Note to the Instructor" (i.e. why would this case be useful for MBA students to study), [e.g. Telkom_Letter.docx and Telkom_Letter.pdf]
  2. the case (make it look good), [e.g. Telkom_Case.docx and Telkom_Case.pdf]
  3. the solution (or teaching note), [e.g. Telkom_Solution.docx and Telkom_Solution.pdf]
  4. any supplementary materials (i.e. press clippings, prospectii, recent information on what happened, spreadsheets in Excel) [[e.g. Telkom_Exhibits.xlsx (no PDF necessary for XLS files); Telkom_Press.docx and Telkom_Press.pdf]
  5. a copy of the Powerpoint presentation that you will use in class and [e.g. Telkom_Presentation.pptx and Telkom_Presentation.pdf]
  6. an email from each group member detailing the percentage contributions of each member. The contribution should not just reflect the time devoted but the quality of the time. If you fail to send an email, I assume that your vote for the contributions is for equal.

When the materials are ready, copy to my Dropbox.

All students are expected to attend the presentations. You must email me if you cannot attend the presentations and there needs to be a very substantial reason.

We need to meet as soon as possible. My assistant will coordinate times. It is also possible to more informally meet, say after class, -- just let me know. After your case is decided, I will require a word file with the preliminary description of the case. The file should have a logical name (which will likely by the subdirectory name where your content will reside), for example, Nestle_Overview.docx. The details must include, what you have done so far, and a schedule for completion of the case over the next three weeks. I will also need a short (three or four sentence description and title of the case for the project link page).

The only requirement that I have on content is that the case have international finance content. In particular, in part of the corporate finance case, I would like to see a valuation, i.e. how much is a particular company or project worth. Use detailed financial statement information from Worldscope. Value using discounted cash flows as well as comparables. In the discounted cash flow section, I want an analysis of the cost of capital. You will, in part, use my International Cost of Capital and Risk Calculator.

The case does not have to be historical. It can involve a decision that has not been made yet. Indeed, it can involve a hypothetical decision.

I will promote the cases and you will notice from my CV that five of my students' cases have been published. See for example Telkom South Africa. When posting, my name will be appended as the final name on the case credits. [In finance, by the way, last name out of alphabetical order indicates the smallest contribution.] I will have more information on this during the term.


2b. Case/Project for IIF Track

This is the major requirement in this course. This will be 65% of your grade. Student groups have a choice of either writing an investment management case or doing a research project.

It is critical that you begin work immediately on this project -- and best to start before classes begin. You need to form your groups now and scout out interesting topics.

If you decide to do a case, please follow the guidelines above for the ICF track. The content of the case will be different because it will involve portfolio management. Here are a few examples of high quality investment management cases:

Most groups will choose a research project.

Some examples of some IIF projectsare found here. Interesting data is increasingly available. For example, this site maintained by an Oxford University professor collects annual commodity data over the past 600 years. If you are interested in commodities, this site has great daily data on 98 commodites. It costs only $99 (which I would pay for).

As soon as possible, I need you to send me the list of the members of your group. Ideally, if you could send me in HTML a replica of the format here. The topic and description of the project will be missing.

We will do the group presentations in the 11th and 12th classes.

There should be six documents: (please use consistent file names) I would like both the source files (i.e. Word, Excel, Powerpoint) as well PDFs created for certain key files (see below).

  1. the write up (make it look good), [e.g. 3rd_Quadrant_Shorts.docx and 3rd_Quadrant_Shorts.pdf]
  2. a copy of the Powerpoint presentation that you will use in class and [e.g. 3rd_Quadrant_Shorts.pptx and 3rd_Quadrant_Shorts.pdf]
  3. a guide to your data files, [e.g. 3rd_Quadrant_Shorts_Data_Guide.docx ]
  4. any supplementary materials [[e.g. 3rd_Quadrant_Shorts_Results.xlsx (no PDF necessary for XLS files);]
  5. an email from each group member detailing the percentage contributions of each member. The contribution should not just reflect the time devoted but the quality of the time. If you fail to send an email, I assume that your vote for the contributions is for equal.

When the materials are ready, copy to my Dropbox.

All students are expected to attend the presentations. You must email me if you cannot attend the presentations and there needs to be a very substantial reason.

We need to meet as soon as possible. My assistant will coordinate times. It is also possible to more informally meet, say after class, -- just let me know. After your case is decided, I will require a word file with the preliminary description of the case. The file should have a logical name (which will likely by the subdirectory name where your content will reside), for example, 3rd_Quadrant_Shorts.docx. The details must include, what you have done so far, and a schedule for completion of the case over the next three weeks. I will also need a short (three or four sentence description and title of the research project for the project link page).

One important item for a project like this is the availability of data. You need to work with the Fuqua library to make sure that it is feasible to obtain the data that you need.

The case does not have to be historical. It can involve a decision that has not been made yet. Indeed, it can involve a hypothetical decision.

While I don't publish these projects, they "live" forever on the Internet.



3. Final Assignment

This assignment is worth 30% of your grade. You get this assignment on the day of the 12th lecture and it is due 24 hours later. It consists of four questions. There is an ICF version and a IIF version. Some questions may be the same but some will be different. This is an individual assignment and no collaboration is allowed. The assignment is turned in via a Word document that has 1" margins and 11pt text. The maximum length is two pages. This assignment should not take much time. It is a written assignment (e.g. I am not going to have you calculate hedge ratios). It is also hard to study for. The best preparation is attending and participating in all of the classes.

To preempt the question, yes you can mix it up. You can do a ICF case and select the IIF Final Assignment.



Outside Class Contact

E-mail me at cam.harvey@duke.edu. If needed, call my assistant, Tara Bowens 660-7775 or email her at tbowens@duke.edu, to set up an office visit. At odd hours, you can text me at 919-271-8156 (if I am not available, I simply turn it off, so don't hesitate to text).


Video Clips

I will try to shoot a series of short clips for the course.


Grading

I do all the grading.


Copyrights

I reserve the copyright for all parts of the course. Any commerical reproduction of any course materials including lecture notes taken by students during the class is not allowed unless explicit permission is given by me.


Texts

There are no required texts in Finance 655. However, I do recommend the text by Bekaert and Hodrick, International Financial Management. We will not follow the text but it is a key reference, like Brealey, Myers and Allan is for Corporate Finance.


Outline and Recommended Reading Assignments

Most of the reading for Finance 655 will come from journal articles, working papers and presentations. All materials will be available to you electronically.

Current Events

For the first part of every lecture, we will talk about current events. You need to keep up. I recommend Financial Times followed by Wall Street Journal. I will also be feeding you daily news analysis from a variety of commercial sources used by both professionals in IIF and ICF. These products are valuable and cannot be reforwarded or posted on the Internet.


Pre-Class Reading

Over the winter break, I recommend that you read Niall Ferguson's Civilization: The West and the Rest. In both Investment Management and Corporate Finance, it is very important to have an understanding of history. This book provides a very solid foundation. Niall provides a great overview of the book at his 2011 TED talk.


Class Topics

Here is a tentative list of topics. The schedule is somewhat fluid in that I may spend longer on some topics and spillover to the next class. I might add or delete topics. I will also be interested in your input for topics.



1. Thursday January 16 10:30ET

Course overview/A View of the Recent Financial Crisis and Implications Moving Forward [ICF+IIF]

The first part of the session sets the expectations for the course. I then launch into a discussion regarding the origins and impact of the recent financial crisis for both the practice of corporate finance and investment management. The focus will be on the on-going regulatory changes and methods to reduce the probability of another crisis. The discussion to focus on a myriad of potential causes and whether the same incentives are in place to replay history.




2. Tuesday January 21 10:30ET

Risk[ICF+IIF]/Investing in Emerging Markets [ICF+IIF]

The most of session will be devoted to understanding the concept of risk. We will discuss traditional risk exposure, standard deviation, beta, skew, VaR, uncertainty and ambiguity. A good application is investment in emerging markets. Understanding risk is critical to both investment and corporate finance.




3. Thursday January 23 10:30ET

Hedging[ICF+IIF]

I will talk about my research on hedging and risk management. I will review the current theories and discuss the "practice" of risk management both from my CFO research and from my experience as an advisor to many prominent companies.




4. Monday January 27 10:30ET

Commodities in Investment and Corporate Finance[ICF+IIF]

In most finance texts, there is little or no mention of commodities. This is an important and relatively new asset class. Corporations need to manage their commodity risk. Portfolio managers invest for various reasons in commodities. If we have time, I will talk about my research on gold. Interestingly, the value of gold is about 9% of the value of the combined world market capitalization of all equities and bonds.




5. Thursday January 30 10:30ET

Political Risk [ICF+IIF]

I will discuss my research on measuring political risk. The setting here is to develop a way to take political risk into account for both direct (corporate finance) and portfolio (investment finance). I have new research that extracts "political risk spreads" from sovereign spreads.




6. Monday February 3 10:30ET

Large Scale Project Evaluation [ICF]

How to evaluate large scale projects in international markets. While this topic seems oriented to ICF, it is now common for IIF to use these techniques for identifying firms to outright buy for their portfolios.




7. Thursday February 6 10:30ET

Investing in China [IIF, ICF]

How do we evaluate the risk of both direct investment (setting up operations in China) and portfolio investment?




8. Monday February 10 10:30ET

Investment Styles [IIF]

A discussion of different investment styles. While this topic is more oriented to IIF, there will be an important discussion on the "cost of capital" which is highly relevant for the ICF.




9. Thursday February 13 10:30ET

Common Mistakes in Investment Management [IIF] and Corporate Finance [ICF]

The first part will discuss common mistakes I have seen over the years in the practice of investment management. This will include details of a number of due diligences that I performed. The second part will discuss important issues in the practice of corporate report from a new piece of research published in December 2013. .




10. Monday February 17 10:30ET

Topic Du Jour [ICF+IIF]

The class chooses topics on IIF and the other ICF.




11. Thursday February 20 10:30ET

Class Presentations I [ICF+IIF]

The time allotment depends on the enrollement. Presentations need to allow time for questions.




12. Monday February 24 10:30ET

Class Presentations II [ICF+IIF]

The time allotment depends on the enrollement. Presentations need to allow time for questions. Last half hour for course summary.