PPP Theory

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Recommended: Theories on exchange rate determination

PPP theory is to determine the exchange rate one of the most basic theories, the basic idea is that the exchange rate depends on the price level, rather than the price level depends on the exchange rate. The reasons of people need foreign currency, because it has the purchasing power of general merchandise in the country. Also, the reason is because it has the purchasing power in the country. Therefore, the national currency and foreign currency rating mainly depends on comparing the purchasing power of the two currencies. PPP has two forms: absolute and relative purchasing power parity theory of purchasing power parity theory. Law of one price that the price under the assumption of perfect competition market and domestic goods and foreign goods substitutability between the conditions of existence of completely removing transportation costs, trade barriers and information costs, for a given product, with the same currency price, in different locations will be the same, that the following formula:
R=∑PA/∑PB (S=PIA/PIB)
R (S) refers the spot exchange rate, ∑PA (PIA) refers the identical basket of product price (price indices) of country A or currency A, and ∑PB (PIB) refers the identical basket of product price (price indices) of country B or currency B.
Economists use two versions of Purchasing Power Parity: absolute PPP and relative PPP. Absolute PPP was described in the previous paragraph; it refers to the equalization of real price levels across countries. Relative PPP holds that the percentage change in exchange rates, over any period, equals the difference in the percentage price changes of different countries. It refers to the equalization of real price changes across countries. Absolute PPP implies relative PPP, but the...

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...es other than the respective group entities are in this table.

Question 3
Is AZ management aware of the risks incurred by the company and has it taken the appropriate measures?

Question 4
Give examples of different proactive policies used by AZ to manage its transaction and operating exposure
For those trading risk, operational and financial management of the use of hedging and hedging contracts, which is a leading and lagging payments, swaps and forward contracts. For example, the company predicts that in the future there is need for the U.S. dollar and the RMB exchange rate of RMB against the end, Arizona, the company bought forward contracts to sell U.S. dollars at 6.51 / buy RMB, if the exchange rate is switched to 6.2 RMB/1US $, the company can be arranged in 6.51RMB/1US $, this is offset by the risks are still buying RMB trading

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