Use of the Foreign Exchange Markets by the Sports Exports Company
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.