Purchasing power parity

The absolute version says an identical basket of goods should cost the same everywhere once converted at the spot rate. That version is not much use in valuation, because trade costs, taxes and non tradeable services keep it from holding.

The relative version is the one that matters here, and it is a statement about change rather than level. If prices in one currency are expected to rise three points a year faster than in another, that currency is expected to lose about three points a year of value against the other. It does not have to be true in any given year, and it frequently is not. Over the horizon of a DCF it is the only internally consistent assumption available, because the alternative is to claim you can forecast the currency.

The reason it belongs in a valuation is consistency rather than prediction. A forecast made in a high inflation currency grows at high nominal rates, and a discount rate built in that currency carries the same inflation. If you then convert those cash flows to euros at a rate that never moves, you have taken the inflation benefit and refused the currency cost, and the value comes out too high.

Purchasing power parity and covered interest parity are the same idea from two directions. One works through expected prices, the other through market interest rates, and they should point at the same expected currency path.