The Teaching of International Finance

Article excerpt

1.0 INTRODUCTION

Canadians have never been known for their willingness to take risks. Indeed, their rather conservative attitudes probably help explain one of the successes of Canada's economy, the life-insurance industry. Unfortunately globalization of business is making it imperative that Canadians tackle international competition and its associated risks. Not to do so is to invite an economic decline, even in the previously relatively secure domestic markets. If business educators are to help in this task, they must reduce the anxiety that goes with trading in the highly-risky but also potentially highly-rewarding international marketplace. Educators in the area of international finance can play a particularly important role in this task by giving the next generation of business graduates:

(i) Specific knowledge of the methods that exist for handling international risks.

(ii) General knowledge of the international financial environment so that business people can comprehend developments as they unfold.

This paper examines the ways to achieve these goals through the content and approach taken in business school courses in international finance. However, before we do this, let us consider what it is that makes international finance a distinct discipline, and explain why it is a discipline of increasing importance.

2.0 INTERNATIONAL FINANCE AS A DISCIPLINE

International finance would not qualify as a field of inquiry of its own right - it would simply be finance - were it not for two important facts:

(i) Countries have different currencies.

(ii) Countries have different governments.

Different currencies and governments create distinct problems. Specifically, in the case of currencies, expected returns on investments and the cost of capital are the result of the interaction of movements in local expected returns/costs, and of expected changes in exchange rates. Furthermore, because these two components of expected return/cost are imperfectly correlated, exchange rates represent an additional tier of risk. Similarly, in the case of governments there is a further tier of political risk in addition to the normal business risk. Currency and political issues make international finance a distinct and expanding field. With the volume of foreign exchange transactions exploding at a phenomenal rate - the foreign exchange market is already the largest financial market on Earth - and with the number of governments growing - from former Soviet Republics, members of the Yugoslavian Confederation, and perhaps more devolution yet to come elsewhere - international finance demands more attention than ever.

A growing need to study international finance also comes from the growth in international trade. The fraction of all trade that is international has approximately doubled since 1960, from 10% to 20% of all trade. This is part of the globalization of markets that is now so widely recognized. Indeed, the term "globalization" is probably used more in the context of international finance than in any other field. With international trade involving the exchange of currencies and a need to deal with country risks, business students, especially in a trading nation such as Canada, need exposure to international finance. This said, we must still decide how to provide that exposure in a well-structured, rational way. I shall consider the matter at two levels:

(i) What to teach in international finance as a stand-alone course, or courses.

(ii) What to teach in the international finance section of introductory finance courses.

In addition to what should be taught, I shall offer a few suggestions on how to do it.

3.0 WHAT TO TEACH IN INTERNATIONAL FINANCE AS A STAND-ALONE COURSE

Two models of teaching international finance courses have emerged. In some business schools international finance instructors have the luxury of two distinct international finance courses in their curriculum, while in others there is only one. …