NEW YORK UNIVERSITY STERN SCHOOL OF BUSINESS



INTERNATIONAL FIXED INCOME

NEW YORK UNIVERSITY, STERN SCHOOL

Professor Matthew Richardson

Office: 9-14 Tisch Hall

Telephone: (212)998-0349

Fax: (212)995-4233

Webpage:

E-mail: mrichardson@stern.nyu.edu

Office Hours: Mon 2-4PM/Tues 3-4PM

(or by appointment)

Administrative Secretary:

Telephone: (212) 998-0343

Course Description

This course describes the important international fixed income securities and markets, and in turn develops tools for valuing these securities and managing their interest rate risk. Along with providing a detailed analysis of how to value and measure the risk of fixed income securities in an international context (i.e., in the presence of exchange rates), the course will emphasize a number of special topics. These topics include, among others, (I) the theoretical and empirical relation between international term structures (focusing on the U.S., Europe and Japan), (II) asset allocation in the international fixed income arena, (III) the use and valuation of international-based derivatives, especially interest rate and currency swaps, (IV) a detailed analysis of emerging market debt, and (V) studies of exchange rate crises and their impact on the international bond market.

The study of fixed income securities is highly quantitative in nature. Students should be comfortable with mathematics such as algebra, linear algebra and basic calculus, as well as statistical concepts such as probability distributions, mean, variance, covariance, and regression. A basic background in finance is required, such as the core course, Foundations in Finance. Students will need to use a calculator that can raise a number to an arbitrary power, and are expected to be very familiar with a spreadsheet package like Excel (including, for example, its solver function). It is my experience that if students do not satisfy this criteria, then they tend to struggle in the class.

It is not necessary that students have taken either fixed income (B40.3333) or international (B40.3388) before taking this class. In fact, this course overlaps with each of these courses around 25%. This course is most suitable for students who want either (I) a strong background in international fixed income, or (II) some background in fixed income and international (but don't want to take both courses).

Course Materials

The main course material is a collection of presentation slides which will be used in each lecture. Hardcopies of these slides are available at the bookstore or more directly on my webpage (i.e., ). Students should make notes directly onto their hardcopy, and thus can spend more time listening and participating in the lecture. A secondary course material is a collection of readings, which provide additional discussion of the issues brought up during the lectures. These materials will be handed out periodically during the semester.

Unfortunately, there are no good textbooks on international fixed income. Two books on fixed income I recommend are:

Tuckman, Fixed Income Securities , Wiley, 1995, and

Sundaresan, Fixed Income Markets and Their Derivatives, South-Western, 1997.

With respect to international finance, I prefer the following books:

For those who wish to purchase these books, any large chain, such as Barnes and Noble, will carry a copy of the book, or alternatively, they can be ordered over the internet at , among other sites. It is not necessary to purchase any of these books for the class - the course materials are self-contained.

Course Requirements

Grades will be based mainly on exam scores: midterm (40%), and final (60%). Problem sets will be graded on a check, check-plus, check-minus, or no credit basis. These problem sets count for borderline cases, of which I expect 25% of the class will find themselves in.

With respect to the exams, you are allowed one 8.5x11 inch page of notes for the midterm and two 8.5x11 inch pages of notes for the final.

With respect to the problem sets, because the material in the course is analytical and new concepts build on old ones, it will be essential to do the problem sets in order to follow the lectures and succeed on the exams. In order to facilitate learning, I encourage students to work together on these problem sets. Groups of students working together should submit just one assignment. All students in the same group will get the same grade. I will not accept late assignments even if a dog ate it. (Someone’s did a few years back).

On the next page, I provide a tentative schedule for the lectures in the class.

TENTATIVE SCHEDULE OF LECTURES

Topic I: Introduction

Course overview and survey of major international fixed income markets. (January 19).

Topic II: Fixed Income Overview

This part of the course covers the valuation and interest rate sensitivity of fixed cash flows, including an analysis of the discount function, no arbitrage valuation, important concepts such as yield-to-maturity and forward rates, and the key risk measures, namely duration and convexity. Along with applying these concepts to a portfolio of securities,

these tools are then used to show how to hedge the interest rate risk of securities with fixed cash flows. The topic ends with a discussion of the valuation and risk of floating rate securities. (January 24,26,31; February 2,7,9).

Topic III: The Basics of International Finance

This part of the course introduces exchange rate risk and determination to the world of fixed income. Particular emphasis is placed on the relation between spot and forward rates, a detailed discussion of the well-known international parity conditions, and a brief history of the international monetary system, including fixed and floating-rate regimes. (February 14,16,23,28).

Midterm Exam (In class: March 1) (Based on Materials Through February 16)

Topic IV: Empirical Factoids About International Fixed Income

This topic looks at the empirical relation between term structures internationally, and documents (I) the factors that move bond prices, (II) the correlation structure across major countries, and (III) the components of these movements. (March 6,8).

Topic V: The Pricing and Risks of Global Fixed Income Investing

This series of lectures works off the foundations laid in Topics I I- IV, and presents an integrated approach to the valuation and risk analysis of international bonds. This analysis includes a quantitative and theoretical analysis of international term structures and considers the asset allocation decision across markets. (March 20,22,27).

Topic VI: Emerging Market Debt

This topic covers emerging market debt, with a special emphasis on so-called Brady Bonds, that is, emerging market debt denominated in U.S. dollars. The analysis includes both the valuation and risks of this debt, as well as an overview of the emerging markets for debt securities. (March 29, April 3).

Topic VII: Financial Crisis and the International Bond Market

This series of lectures discusses the impact of global financial crises on the international fixed income market. The first lecture will describe examples of recent economic crises and how the international bond market was affected. The last two lectures will look at specific examples closely, with guest speaker Jaime Serra (who has been Minister of Trade and Minister of Finance for Mexico during the 1994 Peso crisis) for one, and a detailed analysis of Long term Capital Management for the other. (April 5,10,12).

Topic VII: International Fixed Income Derivatives

This topic covers an analysis of important products markets, including the ever important interest-rate and currency swaps market. Of particular interest, we provide a detailed description of this market, along with an analysis of the valuation and interest rate sensitivity of swaps. Also described is the international repo market, as well as some common exotic securities. (April 17, 19,24,26).

Topic IX: Course Review

An overview of the important concepts of the course. (May 1)

Final Exam

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