FINC 322 Project: Evaluating Purchasing Power Parity & FX Risk

This report provides an analysis of purchasing power parity (PPP) and foreign exchange (FX) risk within the context of international finance. It begins with an introduction to the significance of these issues, particularly for international investors facing economic uncertainties and currency fluctuations. The literature review examines the International Fisher Effect and PPP, highlighting their roles in understanding currency valuation and risk exposure. The report discusses how derivative instruments, such as forward contracts, futures, and options, can be employed to mitigate the risks associated with PPP failures and fluctuating exchange rates. Evidence and real-world examples, including the impact of the Euro financial crisis and company-specific cases like Tesco and BHP Billiton, illustrate the practical implications of FX risk. The report concludes by emphasizing the importance of understanding and managing these risks for successful international financial management.