Abstract
Effective currency risk management is one of the most critical challenges for developing countries and emerging markets nowadays. Thus, it requires a comprehensive analysis of its causes, nature, factors, and possible consequences. Since the definition of a currency risk relates to unpredictable changes in exchange rates, its analysis means examining exchange rate volatility and formation. International parity conditions are one of the most straightforward and widespread approaches to explaining exchange rate formation. It includes purchasing power parity and interest parity. The first one is based on the law of one price and means the same purchasing power of currencies involved in buying a homogeneous product or a basket of goods in two countries under some conditions. Interest Rate Parity measures expected changes in nominal exchange rate by the difference in nominal interest rates at home and abroad. Nevertheless, clear theoretical foundations and empirical testing of theoretical assumptions have revealed contradictory results. It has led to several anomalies: Purchasing-Power-Parity Puzzle, Forward Premium Puzzle, and Forward Bias Puzzle. Despite all trials to solve the puzzles using new economic and econometric approaches to explain exchange rate volatility, there are constant and significant rebounds from theoretical models. Thus, we emphasize the need for a multidisciplinary approach to currency risk management that considers economic, political, and social factors. One possible method relates to improving existing models economically (adding new elements) or econometrically (applying the updated mathematical models). An alternative way is to analyze a currency risk as a systematic one depending on global factors. Consequently, the focus on exchange rate modeling and forecasting shifts to calculating and analyzing its premium. This approach might be the most prominent for the Ukrainian economy under postwar instability and fragility. Overall, this article provides valuable insights into the complex world of currency risks and offers practical recommendations for managing these risks in an uncertain global economy.
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