Because the Sports Exports Company (an Australian company) receives payments in British pounds every month and converts those pounds into Australian dollars, it needs to closely monitor the value of the British pound in the future. Jim Logan, owner of the Sports Exports Company, expects that inflation will rise substantially in the United Kingdom while inflation in Australia will remain low. He also expects that the interest rates in both countries will rise by about the same amount.
a. Given Jim's expectations, forecast whether the pound will appreciate or depreciate against the Australian dollar over time.
b. Given Jim's expectations, will the Sports Exports Company be favourably or unfavourably affected by the future changes in the value of the pound?
c. If Jim expects that interest and inflation in the United Kingdom will rise at the same rate, and that the interest rate and inflation in Australia will remain low for at least one year, what strategy should Jim take to avoid the loss due to the exchange rate exposure? Explain.