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■ CHAPTER 11 Operating and Accounting Currency Risk

A number of economists maintain that currency exchange rates embody expectations about different determinants-i.e., inflation rates, interest rate, balance of payment, etc., while others claim that the known models have failed to outperform the simple random walk models.1 Under either scenario, any nonzero difference from expectations would be unexpected surprises that could expose the enterprise to currency risk. Hedging currency risk is one of the main approaches that multinational companies use to mitigate this risk.