Page 223 - Microsoft Word - 00 ACCA F9 IWB prelims 2017.docx

Chapter 13

Foreign exchange risk

Outcome

By the end of this session you should be able to:

 explain the meaning and causes of translation risk, transaction risk and
economic risk

 describe how the balance of payments can cause exchange rate fluctuations

 explain the impact of purchasing power parity on exchange rate fluctuations

 explain the impact of interest rate parity on exchange rate fluctuations

 use purchasing power parity theory (PPPT) to forecast exchange rates

 use interest rate parity theory (IPPT) to forecast exchange rates

 explain the principle of four-way equivalence and the impact on exchange rate
fluctuations

 explain the significance of the currency of an invoice on foreign currency risk
management

 discuss and apply netting and matching as a form of foreign currency risk
management

 discuss and apply leading and lagging as a form of foreign currency risk
management

 define a forward exchange contract

 calculate the outcome of a forward exchange contract

 define money market hedging

215