Interest rate parity theory (IRPT)--claims that the difference between the spot and the forward exchange rates is equal to the differential between interest rates available in the two currencies. Fo=So*(1+Ic)/(1+Ib)  basic currency is what the currency needed

Purchasing power parity theory (PPPT)- claims that the rate of exchange between two currencies depend on the relative inflation rate within the repective country

S1=So*(1+Hc)/(1+Hb) Hb-Inflation rate in country for which the spot is quoted

Bid and offer prices--Banks dealing in foreign currency quote two prices for an exchange rate: a lower bid price and higher offer price

International Fisher Effect--- assumes that all countries will have the same real interest rate, although nominal or money rates may differ due to expected inflation rates.Thus the interest rate differential between two countries should be equal to the expected inflation differential. Therefore, countries with higher expected inflation rates will have higher nominal interest rates, and vice versa.
（1 + i）=（1 + r）（1 + h）

Aggressive – finance most current assets, including ‘permanent’ ones, with short term finance. Risky but profitable.
Conservative – long term finance is used for most current assets, including a proportion of fluctuating current assets. Stable but expensive.
Matching – the duration of the finance is matched to the duration of the investment.

Sensitivity analysis is the analysis of changes made to significant variables in order to determine their effect on a planned course of action.

Selling price, Sale valum, initial cost, cost of capital, operating cost, benefit

Advantages: - Simple - Provides more information to allow management to make subjective judgments - Identifies critical estimates.

Disadvantages: - Assumes variables change independently of each other- Does not assess the likelihood of a variable changing - Does not directly identify a correct decision.

Simulation is a technique which allows more than one variables to change at the same time.

Probability analysis- An expected value is the quantitative result of weighting uncertain events by the probability of their occurrence.

operational gearing=100 x contribution/PBIT

efficient market hypothesis

●Weak form efficiency---implies that prices reflect all relevant information about past price movements. 
●Semi-strong form efficiency-- implies that prices reflect past price movements and publicly available knowledge.Share prices respond quickly to new information as it becomes available
●Strong form efficiency --implies that prices reflect past price movements, publicly available knowledge and inside knowledge.share prices reflect all information

Evaluation of hedges ： Money market hedge  Forward market hedge  Lead payment

The relative costs of the three hedges can be compared since they have been referenced to the same point in time, i.e. six months in the future. The most expensive hedge is the lead payment, while the cheapest is the forward market hedge. Using the forward market to hedge the account payable currency risk can therefore be recommended.

Uncertainty can be said to increase with project life, while risk increases with the variability of returns

Sensitivity analysis--This technique looks at the effect on the NPV of an investment project of changes in project variables,

considering risk in the investment appraisal process

Sensitivity analysis--considers each project variable individually.

Probability analysis--This technique requires that probabilities for each project outcome be assessed and assigned.

Risk-adjusted discount rate--It is often said that ‘the higher the risk, the higher the return’

Adjusted payback--If uncertainty and risk are seen as being the same, payback can consider risk by shortening the payback period..

Monetary policy aims to influence monetary variables such as the rate of interest and the money supply in order to achieve targets set for employment, inflation, economic growth and the balance of payments.

Fiscal policy involves using government spending and taxation in order to influence aggregate demand in the economy.

If government spends moreà increase expenditureàraise demand （expansionary policy）
If government reduces taxàstimulate demand （expansionary policy）
If government raise tax or reducing spending àreduce demand （contractionary policy）

Operating leasing offers a solution to the obsolescence problem,

Yield curve

Expectation theory
Liquidity preference theory
Market segmentation theory

General and specific inflation rate

a specific inflation rate is the rate of inflation on an individual item.
The general inflation rate is a weighted average of many specific inflation rate.