Topics in Emerging Financial Markets

C15.0023 Spring 2005

Professor J.P. Mei
New York University
All Rights Reserved

Case Presentations:

Cases & Solutions:

AOL-Legend JV

Legend, Legend 1, Legend 2





Cheung Kong Holdings

Cheung Kong, Cheung Kong

China Eastern Air

CEA Case

China Mobile

China Mobile

Emirates Airlines Slides

Emirates Case, Emirates Case Excel

Hyundai Motor Company


KWaste Power

Karnataka Waste Final Paper, Karnataka Waste Power Valuation

LG Telecom

LG Telecom



Samsung Presentations


Sao Tome & Principe

Sao Tome & Principe Paper




TSMC Case, TSMC Financials, TSMC Solutions

Course Description

The course covers essential elements of emerging financial markets, securities and how the securities are valued and traded. The perspective is that of the investment manager, responsible for investment portfolios of insurance companies, banks, pension funds, mutual funds, endowment funds, and personal trusts. What we cover in this course has obvious implications for asset allocation and security selection strategies. We discuss several outstanding problems of emerging market investment, including political risk, currency risk, speculative craze, market manipulation, different accounting rules, and performance measurement. We will also cover emerging market security valuation, portfolio diversification, project finance, and venture capital. The objective here is to train highly skilled financial analysts and managers with strong theoretical background and practical knowledge about emerging markets.

Prerequisites Finance core courses  

Background Reading: Malkiel and Mei, Global Bargain Hunting (Touchstone 1998).

Internet Resources:

1.Emerging Market Corporate Finance by Prof. Cam Harvey (I have incorporated some Prof. Harvey's material in my course)

It is most important that students keep up to date with the reading for the course. The closed-book final examination questions will be taken from the readings that appear in the Syllabus and from case assignments that are distributed on a regular basis. The grade will be based on a final examination (30%) and a group project (70%).

The group project will be conducted by a group of 5 students, which will focus on the construction and marketing of a country fund or writing a business plan.

1)    For country fund, it will include writing a prospectus, a quarterly report, and a powerpoint document for a “road show”. Towards the end of the term, every group is expected to do a road show, i.e. convince an investment committee made of your peers and myself that the fund is a good long term investment. Every student needs to make 4-5 minutes presentation on behalf of the team. The grade will be based on the prospectus, the quarterly report, and the performance at the “road show”.

2)    For Business plan, it will include a plan report and a powerpoint document for a “road show”. Towards the end of the term, every group is expected to do a road show, i.e. convince an investment committee made of your peers and myself that the plan is feasible. Every student needs to make 4-5 minutes presentation on behalf of the team.


Lecture 1: Measuring Return And Volatility.

We will begin by discussing why emerging market provide the great growth opportunities. We will then study the issues of measuring Emerging Market equity returns, return distributions, and the general evidence of market volatility. We will examine short- vs. long-term correlations of various different markets. We will also study the relationship between risk and returns. Then, we will take a close look at the volatility of market valuations and how this volatility may affect asset allocation. Finally, we will discuss alternative measurement of risk and the impact of speculation on volatility.

Assigned readings:

1.    The Myth of Asia's Miracle by Paul Krugman(Required)

2.    The Distributional Characteristics of Emerging Market Returns, Bakaert, Erb, Harvey, Viskanta

Lecture 2: Currency Crisis

These lectures cover issues related to exchange rate determination. We will examine currency market volatility and contagion, which will be followed by a microeconomic analysis of the Asian financial crisis. Then, we will cover some structural problems in EM economies.

Assigned readings:

1. Michael Pomerleano, 1999, The East Asia Crisis and Corporate Finance, Emerging Market Quarterly.(Required)

Lecture 3: Managing Political Risk

This lecture will cover a brief history of submerged markets (e.g. Russia, Argentina, Mexico) and survivorship bias. We will also examine the corruption issue. We will outline major political risk in the past and present. Finally, we will cover issues related to measuring and insuring political risk.

Assigned readings:

1. "Global Bargain Hunting" by Burton Malkiel and J.P. Mei (Touchstone): Chapter 3 & 4
2. "Political Uncertainty, Financial Crisis, and Market Volatility" by Jianping Mei and Limin Guo. PDF(Required)
3. Campbell R. Harvey, "Expected Returns and Volatility in 135 Countries" with Claude Erb and Tadas Viskanta, Journal of Portfolio Management Spring 1996, pp. 46-58. (P36) PDF

Lecture 4: Forecasting Currency Crisis and Risk Management

We will discuss various models for exchange rate forecasting. We will present actual data on 11 disguised countries and asks students to consider which is most likely to experience a crisis. We will also study currency hedging from both corporate finance and portfolio investment perspective.

Assigned readings:
1. HBS Case: Currency Crises by Robert E. Kennedy and Brian P. Irwin(Required)
2. Case Study: Identifying, measuring, and hedging currency risk at Merck, JACF

Lecture 5. Corporate Governance Issues in EM

This lecture will examine corporate governance issue and corruption issue and how they may affect investment value and corporate finance.

Assigned readings:

1.    "Global Bargain Hunting" by Burton Malkiel and J.P. Mei (Touchstone): Chapter 3 & 4

2.    Stijn Claessens and Joseph P.H. Fan, 2002, Corporate Governance in Asia: A Survey, View temporary PDF

Lecture 6: The Top-Down, Bottom-up, and Momentum Strategies

This lecture will begin by studying various ways of gauging valuation levels of emerging markets. We will discuss the Smith Barney Global Asset Allocator Model and its performance. The application of this model in a single market is also discussed. We will also demonstrate how momentum strategies may be applied to achieve market outperformance.

Assigned readings:

  1. Geert Rouwenhorst, "International Momentum Strategies" Journal of Finance 53, 1998, 267-284. PDF. (Required)
  2. E. Fama and K. French, “Value and Growth: The International Evidence”, Journal of Finance, December 1998, PDF.
  3. "Valuation in Emerging Markets", McKinsey Quarterly 2000, number 4. PDF.
  4. Tsingtao Breweries: Valuation with Changing ROE. by Aswash Damodaran
  5. Emerging Market PE Ratios: 2000 by Aswash Damodaran


Lecture 7: Cost of Capital and Asset Valuation

We will discuss the determination of cost of equity capital for Emerging Market investment, followed by a review of valuation techniques used to assess cross-border investments. We will then cover the discounting of free cash flows with a weighted average cost of capital and the use of adjusted present value.

Assigned readings:

1. The Goldman Model of Equity Cost of Capital, Kent Hargis, PDF(Required)
2. Rene Stulz, The globalization of equity markets and the cost of capital, PDF.

Lecture 8. Real Options in Emerging Market Investment 

  1. Campbell R. Harvey, Identifying Real Options, View HTML(Required)
  2. "The Real Power of Real Options", McKinsey Quarterly 1997 No. 3: PDF.


Lecture 9: Credit Risk Measurement.

This lecture extends the z-score model to estimates the credit quality of emerging market corporate debt. We will then show how fixed income securities work and how they are valued. We will focus on the Brady bond market. We will then examine the relationship between credit risk and bond yields.

Assigned readings:

  1. Emerging Market Corporate Bonds—A Scoring System, by Ed Altman (Required)
  2. Risk Premiums for Other Markets, Download
  3. Moody's Moody's, S&P Ratings, PDF


Lecture 10: Financing of the Mozel Project

Mozel is $1.4 billion aluminum smelter project in Mozambique. This case is designed for people with an interest in capital investments in emerging markets. It presents an extreme example of political risk in a developing country and shows how project sponsors attempt to mitigate the risks through project selection, structuring, and insurance.

Assigned readings:

1. HBS Study: An Overview of Project Finance (HBS: N9-200-028) PDF(Required)
2. HBS Case: Financing the Mozal Project, by Benjamin C. Esty and Fuaad A. Qureshi
3. Ben Esty's excellent project finance portal

Lecture 11: Infosys: Financing an Indian Software Start-Up

This case describes the financing and growth of Infosys, an Indian software start-up. The company must decide whether it should seek to also list its shares on a U.S. stock exchange and, if yes, whether to list on NASDAQ or NYSE.

Assigned readings:

1: HBS Case: Infosys: Financing an Indian Software Start-Up, by Walter Kuemmerle and William J. Coughlin

Lecture 12: Bank Risk Management and Financing

We will begin by discussing the financial crisis in many EM banks. We will outline the major risks faced by these banks. In managing these risks, we will discuss capital adequacy, risk based capital ratios, deposit insurance, and other liability guarantees. We will cover liquidity and liability management, product and geographic diversification, risk management using derivatives, and securitization.

Assigned readings:
1. NYU Case: ICICI Debt Financing

Writing an Emerging Market Case

In this course, you will build a case with a group of your classmates. Here are the steps you should take:

a) Begin work immediately by forming your groups and get interesting case ideas.
b) I would advise you work closely with international students in the class, in particular, those from emerging markets. They might have some
connections and interesting ideas.
c) Find a most efficient way of obtaining data, via express mail, fax, or email.
d) When you start, use the following checklist:

1: Collect Press Information on the Company
2. Collect Macroeconomic, Social, and Political Condition of the country over the last ten years.
3: Collect Balance sheet and Income statement information
4: Collect Market Data on price, dividends, trading volume, and earnings forecast
5: Collect data on debt ratings and yields on similar bonds
6: Apply valuation models
7: Write research report

Please note that the case must be finance related and use some of the tools taught in the course (such as country risk analysis, cost of capital models, credit rating, portfolio management, capital structure, Present Value analysis, etc). Be innovative and try to identify new investment opportunities. You may also update one of the case studied in the course but you’ll get less credits. For example, a group of former Russian students once wrote a case on how to start Internet cafe in Moscow.

Remember: the easier it is to obtain good data, the more complex an analysis I would expect. You need to strike a balance between data availability and depth of analysis. You will not have a good case if you have no data to back up your story.

Previous Cases Available (see top of the outline)

These two cases should also provide a model for your preparation. A set of cases by Duke Students are available for your references as well as the following case:

1. Financing of the Petrozuata Project


You should deliver to me the following by the end of

a)   1/26: Email me team memebers (5 points)

b)   2/23: a word file that provides an outline of your case. It must include the main story line and what you have done so far. (5 points)

c)   3/23: A summary of Press information and information on Macroeconomic, Social, and Political Condition of the country over the last ten years.  (5 points)

d)   4/11: Summary of company financial information and analysis  (5 points)

e)   4/18: Valuation analysis (5 points)

f)    4/20 Road show (30 minutes each, 25 points)

g)   5/ 4 Final version:  It must include the following components (in either word or PDF (PDF preferred)) (20 points):

  1. A one-page executive summary (on why this is an interesting case for Senior Undergraduates)
  2. The case
  3. Teaching note (Solution to the case)
  4. PowerPoint presentation
  5. Supplementary materials (i.e. analyst report, press clippings, what happened recently, spreadsheets,etc)

Or Group Project II: International Business Plan

(You Should Start Working Now!)

In this course, you may also develop a business plan with a group of your classmates. Here are the steps you should take:

a) Begin work immediately by forming your groups. Find a product or a business that is under developed in certain markets/countries in the world.

b) I would advise you to work closely with other students in the class. They might have some connections and interesting ideas.

c) Find a most efficient way of obtaining data, via express mail, fax, or email.

e) When you start, use the following checklist:

1: Collect pricing information about the product or service
2. Collect costs of labor, production, technology, intellectual property rights, amount investment and other related startup costs (if any)
3: Collect industry competitive information
4: Provide financial analysis as well as major risk analysis
5: Provide Development, Financing, Marketing and other execution Strategies.

Deadline: You should deliver to me the following on

1)    1/26: An email ( notifying me what product/business you select, names of your group members, group leader and his/her email. (5 points)

2)    2/23: A first draft of your B-plan introduction. (5 points)

3)    3/23: A first draft of cost and profit analysis based on costs of labor, production, technology, intellectual property rights, amount investment, and pricing  information. (5 points)

4)    4/11: A first draft of Country/Industry/company analysis for road show document. (5 points)

5)    4/18: PowerPoint presentation slides for road show (5 points)

6)    4/20: Road Show (25 points)

7)    5/4: Final version of Prospectus, quarterly report, road show document, and powerpoint slides. (20 points)


Data resources

1. Global Macroeconomic and Financial Policy Site by Nouriel Roubini