Question

1. John Novack, owner of the O’Hare Sports Exports Company, is concerned about the value of the British pound over time because his firm receives pounds as payment for footballs exported to the United Kingdom. He recently read that the Bank of England (the central bank of the United Kingdom) is likely to intervene directly in the foreign exchange market by flooding the market with British pounds. (20 points – 10 points each)
   1. Forecast whether the British pound will weaken or strengthen based on the information provided.
   2. How would the performance of the O’Hare Sports Exports Company be affected by the Bank of England’s policy of flooding the foreign exchange market with British pounds (assuming it does not hedge its exchange rate risk

*Please answer in DETAIL and type it please!*

Answer 1

a. As the Foreign exchange market is flooded by the BoE with excessive British Pound, there will be a weakening of the currency as increment leads to lowering of interest rates and rise in inflation which means the same amount on goods will now require higher quantum of money.

b. If currency excahnge risk is not hedged, the overall currency value will decline and therefore imports will become more expensive. So, overall there will be a negative impact on his profits as sale can potentially decline and so does the value of Pound.