International Finance and Financial Derivatives Notes
Subject Overview
The fifth Finance group elective, covering the international monetary system and forex markets, parity conditions and international sources of finance, derivatives (forwards, futures, options) and their pricing, and swaps, credit derivatives and foreign exchange risk management. A 4-credit elective theory paper.
Subject at a glance
4
Units
30
Topics
4
Credits
4
Infographics
Unit-wise Syllabus
4 units — open any unit for detailed topic-wise notes, diagrams and important exam questions
- Overview and scope of IFM
- balance of payments fundamentals
- factors affecting international trade flows
- evolution of the international monetary system (Gold Standard, Bretton Woods)
- forex market function/structure/participants
- exchange rate quotations
- 1Gold standard
Until 1914
- 2Inter-war period
Instability
- 3Bretton Woods
1944–1971: fixed to USD, USD to gold
- 4Floating rates
Since 1973
- 5Today
Mix of floating and managed regimes
Study guide
This unit covers the scope of international finance, balance of payments, trade flows, the evolution of the international monetary system and forex market structure. Learn Gold Standard and Bretton Woods.
- Purchasing Power Parity
- Fisher effect
- International Fisher Effect
- Interest Rate Parity
- forward-spot rate relationship
- international capital markets (ADRs, GDRs)
- foreign bond markets
- short-term financing (banker's acceptance, factoring, forfaiting)
Relative PPP
Change in spot ≈ inflation home − inflation foreign
Fisher effect
Nominal rate ≈ real rate + expected inflation
Interest rate parity
F = S × (1 + i home) / (1 + i foreign)
International Fisher
Change in spot ≈ interest home − interest foreign
Study guide
You study PPP, Fisher effects, interest rate parity, forward-spot relations, ADRs and GDRs, foreign bonds and short-term financing. Solve parity numericals.
- Meaning
- types
- importance and regulatory framework of derivatives in India
- forward vs futures contracts
- pricing and mark-to-market
- speculation/hedging/arbitrage
- option contracts
- Black-Scholes model
- put-call parity
- option trading strategies
Put-call parity
C + K e^(−rT) = P + S
Black-Scholes call
C = S N(d1) − K e^(−rT) N(d2)
d1
[ln(S/K) + (r + σ²/2) T] / (σ √T)
d2
d1 − σ √T
Study guide
You study derivatives in India, forwards versus futures, pricing and mark-to-market, hedging, speculation and arbitrage, options, Black-Scholes, put-call parity and strategies. Draw option strategy payoffs.
- Swaps and swaptions meaning
- types and pricing
- credit derivatives and hedging strategies
- measuring and managing transaction/economic/translation exposure
- country risk analysis
- currency futures and interest rate derivatives
Transaction
Value of existing contracts
Forwards, futures, options
Translation
Reported accounts of subsidiaries
Balance sheet hedge
Economic
Long-term cash flows and competitiveness
Operational: sourcing, location
Study guide
You study swaps, swaptions, credit derivatives, exposure management, country risk, currency futures and interest rate derivatives. Hedge a currency exposure using a swap or forward.
Why International Finance and Financial Derivatives Matters
Treasury, forex and derivatives skills are valued in banking, multinational finance and trading roles.
How to Prepare for International Finance and Financial Derivatives
- Practise parity, forward pricing and option payoff problems.
- Follow currency news.
- Learn the Black-Scholes inputs and intuition.
International Finance and Financial Derivatives: Frequently Asked Questions
What is interest rate parity?
It states that the forward exchange rate reflects the interest rate difference between two currencies, removing arbitrage.