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Sample answer to part “(b) Discuss why Okan Co’s subsidiary company may be exposed to economic risk (economic exposure) and how it may be managed” refer to that :”In the case of Okan Co’s subsidiary company, economic risk may have occurred because interest rates have been kept at a high level, causing the original parity conditions to break down.”. because original parity conditions are not referred in BPP workbook, please help me to explain what are original parity conditions in this case? Thanks
It is referring to the fact that we assume that purchasing power parity and interest rate parity apply when estimating future spot rate and forward rates respectively (and I am sure that the BPP workbook does explain them – certainly our free lecture notes do 🙂 ). This may not be the case in practice, particularly here when interest rates have been kept at a high level.
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