The Sports Exports Company continues to focus on producing footballs in the U.S.

Question

The Sports Exports Company continues to focus on producing footballs in the U.S. and exporting them to the United Kingdom. The exports are denominated in pounds, which has continually exposed the firm to exchange rate risk. It is now considering a new form of expansion where it would sell specialty sporting goods in the U.S. If it pursues this U.S. project, it would need to borrow long-term funds. The dollar-denominated debt has an interest rate that is slightly lower than the pound-denominated debt.

3.   Question: Jim Logan, owner of the Sports Exports Company, needs to determine whether dollar-denominated debt or pound-denominated debt would be most appropriate for financing this expansion, if he does expand. He is leaning toward financing the U.S. project with dollar-denominated debt, since his goal is to avoid exchange rate risk. Is there any reason why he should consider using pound-denominated debt to reduce exchange rate risk?

4.   Question: Assume that Jim decides to finance his proposed U.S. business with dollar-denominated debt if he does implement the U.S. business idea. How could he use a currency swap along with the debt to reduce the firm’s exposure to exchange rate risk?

5.   Question: Are there any reasons why the business that has been so successful in the United Kingdom will not necessarily be successful in other European countries?

Explanation / Answer

3. Blades should issue pound denominated notes in order to partly finance the cost. The cost of financing in dollar is known with certainity so Blades could use dollar denominated revenue to cover the financing cost. The cost of financing with pound is uncertain because Blades will have to obtain pound to cover the interest and principal payments of pound loan. Therefore it can reduce its exposure to exchange rate risk

5. The business that has been successful in the United Kingdom will not necessarily be successful in other European countries due to many reasons :

Business meetings remain an intrinsic feature of corporate life in the United Kingdom. Their agendas are circulated in advance of the meeting, so that everybody is prepared.

Moreover communication is very important and plays a crucial role in business which lacks in European countries.ie. there is communication problem between the people of germany and other countries. This might be one of the reason

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