Chapter 5 SBD Answers

Chapter 5 SBD Answers - Chapter 5: Small Business Dilemma...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 5: Small Business Dilemma Use of Currency Futures and Options by the Sports Exports Company The Sports Exports Company receives pounds each month as payment for the footballs that it exports. It anticipates that the pound will depreciate over time against the dollar. 1. How can the Sports Exports Company use currency futures options to hedge against exchange rate risk? Are there any limitations of using currency futures contracts that would prevent the Sports Exports Company from locking in a specific exchange rate at which it can sell all the pounds it expects to receive in each of the upcoming months? ANSWER: The Sports Exports Company can hedge against exchange rate risk by selling futures contracts on pounds. It could use settlement dates that match up with the receivable dates, or could close out the futures contracts at the time the pounds are received. One key limitation is that the number of units for a futures contract is standardized and therefore will not match the exact number of pounds that the Sports
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/14/2011 for the course FINANCE 640 taught by Professor Sen during the Fall '10 term at UMBC.

Ask a homework question - tutors are online