Page 8 - PowerPoint Presentation

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.

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