Chapter 12 Risk CHAPTER 12 – RISK 166 CHAPTER CONTENTS FOREIGN CURRENCY RISK --------------------------------------------- 168 THE EXCHANGE RATE --------------------------------------------------- 169 SPOT 169 RATE SPOT 169 RATE WITH SPREAD EXCHANGE RATE SYSTEMS -------------------------------------------- 170 FIXED (OR 170 PEGGED) RATE SYSTEMS FLOATING 170 RATE SYSTEMS MANAGED „DIRTY‟ 170 OR FLOAT TYPES OF FOREIGN CURRENCY RISK --------------------------------- 171 TRANSACTION 171 RISK ECONOMIC 171 RISK TRANSLATION 171 RISK WHAT MAKES EXCHANGE RATES FLUCTUATE? ---------------------- 172 BALANCE 172 OF PAYMENTS CAPITAL 172 MOVEMENTS BETWEEN COUNTRIES PURCHASING POWER PARITY THEORY (PPPT) 172 INTEREST (IRPT) 173 RATE PARITY THEORY THE INTERNATIONAL FISHER EFFECT 174 HEDGING EXCHANGE RATE RISK ------------------------------------- 176 INTERNAL HEDGING TECHNIQUES ----------------------------------- 177 INVOICE 177 IN OWN CURRENCY LEADING 177 PAYMENT
Chapter 12 Risk CHAPTER 12 – RISK 166 CHAPTER CONTENTS FOREIGN CURRENCY RISK --------------------------------------------- 168 THE EXCHANGE RATE --------------------------------------------------- 169 SPOT RATE 169 SPOT RATE WITH SPREAD 169 EXCHANGE RATE SYSTEMS -------------------------------------------- 170 FIXED (OR PEGGED) RATE SYSTEMS 170 FLOATING RATE SYSTEMS 170 MANAGED OR „DIRTY‟ FLOAT 170 TYPES OF FOREIGN CURRENCY RISK --------------------------------- 171 TRANSACTION RISK 171 ECONOMIC RISK 171 TRANSLATION RISK 171 WHAT MAKES EXCHANGE RATES FLUCTUATE? ---------------------- 172 BALANCE OF PAYMENTS 172 CAPITAL MOVEMENTS BETWEEN COUNTRIES 172 PURCHASING POWER PARITY THEORY (PPPT) 172 INTEREST RATE PARITY THEORY (IRPT) 173 THE INTERNATIONAL FISHER EFFECT 174 HEDGING EXCHANGE RATE RISK ------------------------------------- 176 INTERNAL HEDGING TECHNIQUES ----------------------------------- 177 INVOICE IN OWN CURRENCY 177 LEADING PAYMENT 177
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