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A theory that the interest rate differential between two countries is equal to the differential between the
forward exchange rate and the spot exchange rate. Interest rate parity plays an essential role in foreign
exchange markets, connecting interest rates, spot exchange rates and foreign exchange rates.

Interest rate parity is a non-arbitrage condition which says that the returns from borrowing in one
currency, exchanging that currency for another currency and investing in interest-bearing instruments of
the second currency, while simultaneously purchasing futures contracts to convert the currency back at
the end of the holding period, should be equal to the returns from purchasing and holding similar interest-
bearing instruments of the first currency. If the returns are different, an arbitrage transaction could, in
theory, produce a risk-free return.

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An economic theory that estimates the amount of adjustment needed on the exchange rate between
countries in order for the exchange to be equivalent to each currency's purchasing power.

The relative version of PPP is calculated as:

Where:
"S" represents exchange rate of currency 1 to currency 2
"P1" represents the cost of good "x" in currency 1
"P2" represents the cost of good "x" in currency 2

In its "absolute" version, the purchasing power of different currencies is equalized for a given basket of
goods. In the "relative" version, the difference in the rate of change in prices at home and abroad²the
difference in the inflation rates²is equal to the percentage depreciation or appreciation of the exchange
rate.

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Each country has its own currency. Strength of the currency of a country is reflected in thecurrency
exchange rate. We know that Indonesia has Rupiah, the United States had a currency US Dollars
($) and so on. For example if we want to have one (1) United States dollars so we can buy with
a price of Rp. 10.000 (depending on the applicable exchange rate). This is the strength of a
particular currency.

Currency exchange rate can change, even fluctuate at any time. Currency exchange rate of
developed countries experience a sharp fluctuations. Changes in exchange rates can be at once the
potential risks / opportunities for the business. Changes in currency exchange rate is influenced by
many factors, it depend on the supply and demand to the currency, inflation,interest rate differences
between countries, the level of a country's economy and the expectation that the parties concerned.
Expectations of the currency exchange rate is influenced by the situation or condition of political,
social and economic development.

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Exchange rate risk is defined as the variability in value of money that is caused by uncertain
exchange rate changes. Exchange risk is viewed as the possibility that currency fluctuations can
alter the expected amounts or variability in the future cash flows.

 
 



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Changes in currency exchange rates may cause changes in cash flow. This potential changes in
cash flow is exposure. Exposure can be measured clearly in some situations, such
astransaction exposure. For example, Indonesian exporters have signed contracts to export goods
worth $ 1 million to American companies that will be paid in 6 months. Risk of exchange rate
changes can cause changes in cash flow due to exchange rate Rp / $ can be changed at 6 months.
At the core of the contract at a certain rate while the exchange rate in the future can be changed so
that cash transactions of the future of the contract is uncertain.
Domestic-currency invoicing and hedging allow internationally active firms to reduce their

exposure to exchange rate variations. This paper discusses exchange rate exposure in terms of

transaction risk (the risk of variations of the value of committed future cash flows), translation

risk (the risk of variations of the value of assets and liabilities denominated in foreign

currency) and broader economic risk (which takes into account the impact of exchange rate

variations on competitiveness). The paper argues that domestic-currency invoicing and

hedging with exchange rate derivatives allow a fairly straightforward management of

transaction and translation risk and discusses under which circumstances their use is optimal.

Economic risk is by its very nature harder to manage, but the paper argues that natural

hedging provides possibilities for doing so. The discussion of management techniques for

exchange rate exposure is complemented with an analysis of their actual use

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Cash management is a broad term that covers a number of functions that help individuals and businesses
process receipts and payments in an organized and efficient manner. Administering cash assets today
often makes use of a number of automated support services offered by banks and other financial
institutions. The range of cash management services range from simple checkbook balancing to investing
cash in bonds and other types of securities to automated software that allows easy cash collection.

When it comes to cash collections, there are a few popular options today that can make the process of
receiving payments from customers much easier. Automated clearing houses make it possible to transact
a business to business cash transfer that deducts the payment from the customer account and deposits
the funds in the vendor account. Generally, this service is available for a fee at local banks.

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Commercial bank loans, commonly known business bank loans, are taken out by people running a
business or organization. Commercial bank loans are granted by commercial banks that deal with
loans and deposits from big businesses.
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.  
- You need to put up an asset as collateral for this loan such as a car or any
real estate that you possess.
2. Ô  
- A mortgage commercial bank loan is a very common kind of debt instrument,
used to buy real estate properties. Until you repay the mortgage amount, the commercial
bank is given security in the form of a lien on the house title. If you are not able to repay the
loan amount, the commercial bank has the legal right to sell the house to recover the loan
amount.
3. Œ
 
- Unsecured commercial bank loans are loans that are not secured against
your assets. This means you do not need to put any collateral when availing unsecured
commercial bank loans.
4. 



 
 
- Stated income commercial bank loans are ideally
suited for people who do not show high income on their tax returns. Stated income
commercial bank loans give you an opportunity to state personal as well as business income.
However, the documentation level varies from one bank to the next. These kinds of loans can
be quite useful to businesses with a cash component, as it gives them a fixed rate financing
for long term.

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