Changes in Exchange Rates and National Commodity Price Levels

Three proportionality concepts — the Purchasing Power Parity Theory, Fisher Open and the Interest Rate Parity Theorem — involve the relationships between changes in exchange rates and levels and rates of change of national commodity price levels, interest agios and exchange agios. If these propositions are continuously valid in the short run as well as in the long run, exchange risk disappears; the firm’s net worth, income and market value would not be affected by changes in exchange rates, regardless of the currencies in which its assets and liabilities are denominated.1 To the extent that there are deviations from these propositions, either in the short run or the long run, changes in exchange rates may affect the firm’s income and perhaps its market value.