Question

Each month, the Sports Exports Company (a U.S. firm) receives an order for footballs from a...

Each month, the Sports Exports Company (a U.S. firm) receives an order for footballs from a British sporting goods distributor. The monthly payment for the footballs is denominated in British pounds, as requested by the British distributor. Jim Logan, owner of the Sports Exports Company, must convert the pounds received into dollars.

1. Explain how the Sports Exports Company could utilize the spot market to facilitate the exchange of currencies. Be specific.

2. Explain how the Sports Exports Company is exposed to exchange rate risk and how it could use the forward market to hedge this risk.

Homework Answers

Answer #1

1. Sports company can use the spot exchange market to convert their pounds payment into dollars. Company can go to any bank to convert pounds into dollars as per the current spot exchange rate between pounds and dollars.

2. Exchange rate risk that dollar might be depreciated at the time of payment received. It means when he goes to convert pounds into dollars in spot market , he will get less dollars against the pounds due to depreciation of dollar.

Company can use forward market to hedge any exchange rate risk. In that market , company can fix the exchange rate between pounds and dollars and later when it converts , company is ineffective of spot exchange rate at that time .

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
John Novack, owner of the O’Hare Sports Exports Company, is concerned about the value of the...
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) Forecast whether the British pound will weaken or...
Consider a U.S.-based company that exports goods to England. The U.S. Company expects to receive payment...
Consider a U.S.-based company that exports goods to England. The U.S. Company expects to receive payment on a shipment of goods in three months. Because the payment will be in British pound, the U.S. Company wants to hedge against a decline in the value of the British pound over the next three months. The U.S. risk-free rate is 2.32 percent, and the British risk-free rate is 0.72 percent. Assume that interest rates are expected to remain fixed over the next...
1.Briefly explain how a U.S. company that exports to Europe can hedge against exchange rate risk...
1.Briefly explain how a U.S. company that exports to Europe can hedge against exchange rate risk 2.What is the advantage of using options instead of forwarding contracts when hedging against exchange-rate risk? 3.What is the advantage of using forward contracts instead of options to hedge against exchange-rate risk?
ABC exports to France. The company expects to receive EUR100,000 in one year from its sales....
ABC exports to France. The company expects to receive EUR100,000 in one year from its sales. Since it does not want to speculate in the foreign exchange market, ABC decides to hedge in the Money Market. How would it go about implementing its hedge? Assume that the current exchange rate is USD1.2=EUR1; the U.S. interest rate is 3%, and the French interest rate is 5%. Explain your answer.
a2 Milk Ltd Pty. a2 Milk is an Australian company specialising in producing fresh milk and...
a2 Milk Ltd Pty. a2 Milk is an Australian company specialising in producing fresh milk and milk formula. The company has its operations in Australia. Therefore, there expenses are generally invoiced in Australian dollars (AUD). However, it has recently imported supplies from New Zealand, and the bill is invoiced in the New Zealand dollars (NZD) for NZD 1,500,000, payable in 6 months’ time. Suppose a2 Milk’s management is concerned about foreign exchange rate exposure, and would like to hedge this...
You are the manager of a U.S. company situated in Los Angeles and manages the import/export...
You are the manager of a U.S. company situated in Los Angeles and manages the import/export division of the company. The company distributes (resells) a variety of consumer products imported to the U.S.A from Europe and also exports goods manufactured in the U.S.A. to Canada. Therefore, your company is very much dependent on the impact of current and future exchange rates on the performance of the company. Scenario 1: You have to estimate the expected exchange rates between your home...
Mattel is a​ U.S.-based company whose sales are roughly​ two-thirds in dollars​ (Asia and the​ Americas)...
Mattel is a​ U.S.-based company whose sales are roughly​ two-thirds in dollars​ (Asia and the​ Americas) and​ one-third in euros​ (Europe). In​ September, Mattel delivers a large shipment of toys​ (primarily Barbies and Hot​ Wheels) to a major distributor in Antwerp. The​ receivable, €36 ​million, is due in 90​ days, standard terms for the toy industry in Europe.​ Mattel's treasury team has collected the following currency and market quotes in the table below. The​ company's foreign exchange advisers believe the...
1.Chapter 3, Question 6. Bid/Ask Spread Utah Bank’s bid price for Canadian dollars is $.7938 and...
1.Chapter 3, Question 6. Bid/Ask Spread Utah Bank’s bid price for Canadian dollars is $.7938 and its ask price is $.8100. What is the bid/ask percentage spread? 2.Chapter 3, Question 10. Indirect Exchange Rate If the direct exchange rate of the euro is $1.25, what is the euro’s indirect exchange rate? That is, what is the value of a dollar in euros? 3.Chapter 3, Question 11. Cross Exchange Rate Assume Poland’s currency (the zloty) is worth $.17 and the Japanese...
11) Trident — the same U.S.-based company discussed in this chapter, has concluded a second larger...
11) Trident — the same U.S.-based company discussed in this chapter, has concluded a second larger sale of telecommunications equipment to Regency (U.K.). Total payment of £2,000,000 is due in 90 days. Given the following exchange rates and interest rates, how much is the dollar receipt of money market hedge at the end of 90 days? Assumptions Value 90-day A/R in pounds £2,000,000.00 Spot rate, US$ per pound ($/£) $1.5610 90-day forward rate, US$ per pound ($/£) $1.5421 3-month U.S....
Rizzo Company (RC) has GBP 1 million receivables due in one year. While the current spot...
Rizzo Company (RC) has GBP 1 million receivables due in one year. While the current spot price of GBP is USD 1.31, RC expects the future spot rate of British pound to fall to approximately $1.25 in a year so it decides to avoid exchange rate risk by hedging these receivables. The strike price of American-style put options are $1.29. The premium on the put options is $.02 per unit. Assume there are no other transaction costs. Finally, there is...