Currency denomination decision by the Sports Exports Company
The Sports Exports Company continues to focus on producing footballs in Australia and exporting them to the United Kingdom. The exports are denominated in pounds, which has continually exposed the company to exchange rate risk. It is now considering a new expansion project where it would sell specialty golfing products in Australia. If it pursues this Australian project, it will need to borrow funds.
a. Jim Logan, owner of the Sports Exports Company, needs to determine whether Australian dollar- denominated debt or pound-denominated debt would be most appropriate for financing this expansion, if he does expand. Assume that Australia and the United Kingdom have equal interest rates. Logan is also concerned that pounds are steadily weakening post-Brexit. What should be the currency of denomination for new borrowing, if his goal is to minimise exchange rate risk?
b. Assume that Logan faces much lower Australian interest rates than UK rates, if he decides to borrow. Also, assume that the Australian project will produce no revenues during the next three years. Does he have to face a trade-off between paying lower interest rates and hedging his pound receivables?
Potential effects if Switzerland adopted the euro Switzerland has its own currency, the Swiss franc. Switzerland has considered adopting the euro as its currency. There have been many arguments about whether it should do so. Use your knowledge and intuition to discuss the likely effects if the Switzerland adopts the euro. For each of the 10 statements below, insert either INCREASE or DECREASE and complete the statement by adding a clear short explanation (perhaps one to three sentences) of why the UK's adoption of the euro would have that effect. To help you narrow your focus, follow these guidelines. Assume that the Swiss franc is more volatile than the euro. Do not base your answer on whether the Swiss franc would have been stronger than the euro in the future. Also, do not base your answer on an unusual change in economic growth in Switzerland or in the euro zone if the euro is adopted.
a. The economic exposure of Swiss companies that are heavy exporters to the eurozone would __________ because __________.
b. The translation exposure of companies based in the eurozone that have Swiss subsidiaries would __________ because __________.
c. The economic exposure of Australian companies that conduct substantial business in Switzerland and have no other international business would __________ because __________.
d. The translation exposure of Australian companies with Swiss subsidiaries would __________ because __________.
e. The economic exposure of Australian companies that export to Switzerland and whose only other international business is importing from companies based in the eurozone would __________ because __________.
f. The discount on the forward rate paid by Australian companies that periodically use the forward market to hedge payables of Swiss imports would __________ because __________.
g. The earnings of a foreign exchange department of a Swiss bank that executes foreign exchange transactions desired by its European clients would __________ because __________.
h. Assume that the British pound is more highly correlated with the Swiss franc than with the euro. An Australian company has substantial monthly exports to Switzerland denominated in the Swiss currency, and it also has substantial monthly imports of British supplies denominated in British pounds. The economic exposure of this company would __________ because __________.
i. Assume that the British pound is more highly correlated with the Swiss franc than with the euro. An Australian company has substantial monthly exports to the United Kingdom denominated in the British currency, and it also has substantial monthly exports to Switzerland denominated in Swiss francs. The economic exposure of this company would __________ because __________.
j. The Swiss Government's reliance on monetary policy (as opposed to fiscal policy) as a means of fine-tuning the economy would __________ because __________.