Sports Exports

Description

Use of Currency Futures and Options by the Sports Exports Company
The Sports Exports Company receives British pounds
each month as payment for the footballs that it exports.
It anticipates that the pound will depreciate over time
against the U.S. dollar.

1. How can the Sports Exports Company use currency
   futures contracts 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?
2. How can the Sports Exports Company use currency
   options to hedge against exchange rate risk?
3. Are there any limitations of using currency options
   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?
4. Jim Logan, owner of the Sports Exports Company,
   is concerned that the pound may depreciate substantially
   over the next month, but he also believes that the
   pound could appreciate substantially if specific situations
   occur. Should Logan use currency futures or
   currency options to hedge the exchange rate risk? Is
   there any disadvantage of selecting this method for
   hedging?

The website of the Chicago Mercantile Exchange
(www.cmegroup.com) provides information about currency
futures and options.

1. Use this website to review the prevailing prices of
   currency futures contracts. Do today’s futures prices
   (for contracts with the closest settlement date) generally
   reflect an increase or decrease from the day before?
   Is there any news today that might explain the change
   in the futures prices?
2. Does it appear that futures prices among currencies
   (for the closest settlement date) are changing in the
   same direction? Explain.
3. If you purchase a British pound futures contract
   with the closest settlement date, what is the futures
   price? Given that a contract is based on £62,500, what
   is the dollar amount you will need at the settlement
   date to fulfill the contract?
4. Go to www.nasdaqtrader.com and under “Trading
   Products,” click on FX Options. Obtain the money
   currency option quotations for the Canadian dollar
   (the symbol is XCD) and the euro (symbol is XEU) for
   a similar expiration date. Which currency option has a
   larger premium? Explain your results.

Sample Solution