Risk management

Consider a U.S.-based manufacturing firm that is considering a move to the United Kingdom. Because the company will be using the British pound in its operations, the management team has hired you to explain the Purchasing Power Parity Theory.

In a 3-page report, you will research the Purchasing Power Parity (PPP) Theory in exchange rate determination. Include the following:

• Discuss how PPP can or cannot be a determinant of currency exchange rate differences among countries.
• If you assume PPP holds, could it help in forecasting the future exchange rate of the British pound?