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Currency risk management

Purchasing power parity theory (PPPT)

2.1 Purchasing power parity

 ‘Law of one price’.

 Country with higher inflation will suffer a fall in the value of their currency
1+ i
 Future spot rate = Current spot rate × f

 Assumes rates are quoted as indirect quotes.

2.2 Limitations

 Future inflation rates may not be accurate.

 Speculation.

 Government intervention.

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