International Parities (The formulas below will be given to you at the exam) Pur

Question

International Parities (The formulas below will be given to you at the exam) Purchasing Power Parity (PPP): e1/e0 = (1 + ik)'/(1 + ij)' Fisher Effect (FE) (1 + r) = (1 + i)(1 + a) International Fisher Effecl (IFE) e1/e0 = (1 + ra)'/(1 + rj)' Interest Rate Parity (IRP): f1/e0 = (1 + rk)'/(1 + rj)' Foreign Exchange Exposure Measurement and Management Translation Exposure Current Rate method of Translation Functional currency vs. reporting currency The impact of foreign exchange movement on the net translation exposure of a company Hedging translation exposure with forward or options contracts Transaction Exposure What is transaction exposure? Use forward (futures) or options contract to hedge A/R and A/P.

Explanation / Answer

Definition of 'Transaction Exposure' The risk, faced by companies involved in international trade, that currency exchange rates will change after the companies have already entered into financial obligations. Such exposure to fluctuating exchange rates can lead to major losses for firms.

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