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THE TREASURY FUNCTION




            Currency risk







            • The potential for losses due to adverse movements in foreign exchange
                rates.




            Theories for determining forward exchange rates:



            • Interest rate parity - the difference between the spot and forward rates
                is attributable to the difference in the expected interest rates.

                    • Interest rate parity is useful in predicting forward exchange rates over the
                       short term.



            • Purchasing power parity - the difference between the spot and forward
                rates is attributable to the difference in expected inflation rates.

                  Purchasing power parity is useful in predicting forward exchange rates
                  over the long term.


                                                                         NB: Calculations in chapter  15
                                                                         Managerial Finance 8 Edition.
                                                                                                   th

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