Seminar paper from the year 2002 in the subject Economics - International Economic Relations, grade: 1,3 (A), University of Applied Sciences Mainz (Economics), course: European Integration, language: English, abstract: Theories on exchange rate risks and the closely related theory of PurchasingPower Parity (PPP) provide the basis for the analysis of the exchange rateproblems the three car producers face while manufacturing in the UK. 1.1 Theories on exchange rate risksThe exchange rate risk represents one of the most important risks forcompanies operating in international industries.1 There are three kinds ofexchange risks: transaction risk, translation risk and economic risk. Transactionexposure is the risk of changes in the value of currency occurring between thetime of the settlement of the transaction and the maturity of it.2 The second andmost important type of exchange risk is economic risk. Economic exposureoccurs when currencies, that are involved in the actual or potential competitivesituation, become over- or undervalued.3 It can heavily affect current and futurecash flows of domestic and foreign operations.4 The third type of risk is calledtranslation exposure. It refers to the risk that exchange rate fluctuations maychange the value of current assets and liabilities of the balance sheet of aforeign affiliate in case of consolidation.5 [...]1 See: Punett, Betty J. / Ricks, David A., 1994, p. 3052 See: Grosse, Robert / Kujawa, Duane, 1992, p. 4473 Over- and undervaluation are expressions that will be explained under the point 1.2 "e;Theory ofPurchasing Power Parity"e;. 4 See: Czinkota, Michael R. / Ronkainen, Ilkka A. / Moffett Michael H., 1992, p.5425 See: Grosse, Robert / Kujawa, Duane, 1992, p. 447
