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Purchasing Power Risk:Purchasing Power Risk:

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Purchasing Power Risk:Purchasing Power Risk:

Assume that you lend/invest Rs 100 to your friend/in a security today, for a period of one

year at a rate of interest/expected return of 10% per annum.

What is your return, 1. if prices remain stable, 2. and if the prices change? Assume that cost

of living index rises to 112 from a base of 100.

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Purchasing Power Risk:Purchasing Power Risk:

• We may lend or borrow money.

• Both the positions assume risk.

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Forex Risk:

☼ Exposure in various currencies.Exposure in various currencies.

☼ Increased volatility in currency Increased volatility in currency prices.prices.

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Foreign exchange risk: Forms

☻ Transaction ExposureTransaction Exposure

☻ Translation ExposureTranslation Exposure

☻ Economic ExposureEconomic Exposure

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Transaction Exposure:Transaction Exposure:

• Time zone gap.Time zone gap.

• Currency difference.Currency difference.

• Fluctuating Currencies.Fluctuating Currencies.

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Translation ExposureTranslation Exposure

• Geographical Variations.Geographical Variations.

• Business Consolidations.Business Consolidations.

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Economic Exposure:Economic Exposure:

Impact of interest rates/inflation on the exchange rateImpact of interest rates/inflation on the exchange rate

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Operational Risk:Operational Risk:

Potential loss arising as a result of inadequate or failed internal processes,

people and systems or from external events.”

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Operational Risk: Operational Risk: Drivers:Drivers:

• People

• Processes

• Technical

• Technology

• External Environment