Purchasing power parity, interest rate parity &
international fisher effects can only show 10% of the changes or
variations in the exchange rates.
There is problem with underestimated situations & its
influence on exchange rate variations.
Small movements in exchange rate fluctuations can be predicted
easily but large movements can’t be predicted with level of
Apart from this following are some of the exchange rate risks
that make forecasting difficult:
Transaction risk – this is a cash flow risk that deals with the
effect of exchange rate moves – it influences to receivables,
payables or repatriation of dividend.
Translation risk – this is a balance sheet exchange risk – here
the exchange rate moves to the valuation of foreign subsidiary’s
balance sheet & in turn affects the balance sheet of the parent
Economic risk – this is a risk to the present value of future
operating cash flows from exchange rate movements. The economic
risk has an influence on exchange rate on revenues i.e. domestic
sales & exports & operating expenses i.e. cost of domestic
inputs & imports.