Core concepts
- 01Forex risk types: transaction, translation, economic.
- 02Hedging tools: forward, currency futures, options, money market hedge, swaps.
- 03Parity conditions: Interest Rate Parity, Purchasing Power Parity, Fisher Effect.
- 04Cross rate computed via vehicle currency (usually USD).
- 05International capital budgeting — translate to home currency, account for tax & repatriation rules.
Flowchart
Parity Conditions | IRP: F/S = (1+ih)/(1+if) | PPP: S₂/S₁ = (1+ih)/(1+if) [inflation] | Fisher: (1+r_nom) = (1+r_real)(1+inflation) | International Fisher: relates interest & expected fx change
Exam-critical pointers
- ⭐Quote conventions: direct (₹/$) vs indirect ($/₹).
- ⭐Translation exposure addressed by Ind AS 21 — functional currency concept.
- ⭐Country risk: political, economic, transfer — affects required return.
- ⭐Triangular arbitrage exploits inconsistency in cross rates.
Make it click