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2009 Q4 GEM FY Elective:  Global Financial Markets (GBUS 751)
Professor Frank Warnock

 ·        Currencies that are allowed to float have moved sharply the past few years. What explains recent currency movements, and what will the likely directions be in 2009 and beyond?
·        Long-term U.S. interest rates have fallen to historical lows. Is this a conundrum or explainable, and what are the likely movements of long-term rates in 2009?
·        Yield curves in many industrial countries have recently steepened quite a bit, with the U.S. yield curve being about as steep as it ever gets. Is a global recovery imminent?
·        Is there a small set of variables that can reliably predict emerging market currency crises?
·        As a manager, how can I hedge against currency and interest rate movements?

In Global Financial Markets, we will tackle these issues and more.  The main objective is to develop the technical skills that enable students to improve their understanding of current conditions in global financial markets, especially those for currencies and interest rates.  We focus on global financial markets, but because interest rates and exchange rates are driven by, among other things, the state of the economy, and in turn impact future economic performance, students can use this course to solidify their knowledge of global economics.

Throughout, our thinking will be anchored in models—Technical Notes will both elaborate on the models and help the students translate them into actual data series—but our applications will be from the real world.  The anchoring in theory is important: In your careers you will come across many ‘fad’ explanations for why the past didn’t turn out as planned or why the future will be different.  With the experience of applying a small toolkit of theory to many situations, you will have the ability to examine fad explanations—indeed, any explanation—within a tight logical framework.

To the extent that students decide that predicting interest rate and currency movements is a fool’s game, we will also analyze hedging strategies that allow firms and investors to manage currency and interest rate exposure.

The course will include cases, short technical notes, outside readings from the Street and elsewhere, current data to analyze, and three guest discussion leaders.  Your course grade will be 40% participation and 60% final exam.

Class 1 (March 17)

Outlook 2009: A Changed Regime (The Bank Credit Analyst, vol. 60 no. 7)
Outlook 2008: Waiting For Reflation (The Bank Credit Analyst, vol. 59 no. 7)

Class 2 (March 18)

The Determinants of Interest Rates (UVA-BP-0489)
Greenspan’s Conundrum and Bernanke’s Nightmare (UVA-BP-Draft)

Class 3 (March 23)

The Yield Curve as a Leading Indicator: Frequently Asked Questions (NY Fed)
Yield Curve Angst (Morgan Stanley)
Yield Curve Inversions—Do They (Still) Matter? (MacroAdvisers Monetary Policy Insights)

Class 4 (March 24)

Liability Management at General Motors (HBS-9-293-123)

Class 5 (March 30)

Exchange Rate Models (UVA-BP-0496)

Class 6 (March 31)

FX Strategies in 2006: Dollar v. Yen (UVA-BP-0505)
Goldman Sachs’ Anecdotal Sentiment and Capital Flows (3 April 2006)

Class 7 (April 1)

The Oil Market
Guest: Trevor Reeve (Deputy Associate Director, Federal Reserve Board)

Will the Oil Market Continue To Be Tight? (IMF WEO 2005:1 Chapter 4)
Crude Oil: Downside Risk from Demand (Deutsche Bank 9/29/2008)
On the Link between the Dollar and Oil (Morgan Stanley 8/25/2008)
Commodities as an Asset Class (Morgan Stanley 9/18/2006)

Class 8 (April 6)

Medium-Term FX Strategies
Guest: Jeremy Fand (FX Strategist, Tudor Investment Corp)Prospective Capital Flows and Prospective Capital Flows and Currency Movements: USD v. Euro (UVA-BP- Flows and USD)
BIS Quarterly Review (March 2009) article: The US Dollar Shortage in Global Banking
Global Economic Policies and Prospects (Note by the Staff of the IMF in preparation for the Group of Twenty Meeting of the Ministers and Central Bank Governors March 13–14, 2009 London, U.K.)

Class 9 (April 7)

Hedging Currency Risks at AIFS (HBS 9-205-026)
FT Articles: US company earnings hit by turbulence in currency markets (2/5/09) and Currency bets catch out Brazil’s Aracruz, Sadia (3/27/09)

 Class 10 (April 13)

Hong Kong’s Financial Crisis 1997-1998 (HKU031)

Class 11 (April 14)

Early Warning Systems (UVA-BP-0497)
Early Warning Systems of Currency Crises: Argentina 2001, Indonesia 1997, and Hong Kong 1998 (UVA-EWS Case Draft)

Classes 12 and 13 (April 20/21)

Emerging Market Country Presentations

Class 14 (April 27)

Long-Term FX Strategies
Guest: Marc Chandler (Global Head of Currency Strategy, Brown Brothers Harriman)
Global Asset Allocation: Whither the U.S. Dollar? (UVA-F-1591)
World on the Mend? (Brown Brothers Harriman FX Quarterly Review Q2 2009)
QE Paradox (BBH Special FX, 4/17/2009)

Class 15 (April 28)

Outlook 2009: A Changed Regime (The Bank Credit Analyst, vol. 60 no. 7)

Final Exam Case: Whither the US Economy? (BP-0542)