Use of the Foreign exchange Markets by the Sports Exports

company

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1.MD. ASHFAQ UDDIN KHAN 2009-2-10-3072.lalun nahar tonny2008-3-10-0403.SABRINA SHARMIN KHAN2008-3-10-0594. NUSRAT NAWREEN2008-3-10-1035.ABDULLAH KAMAL2009-3-10-0566.SYED EBNA AL KAWSAR2008-2-10-179

Group members name and Id

Sports exports company

Spot market utilization

Using forward contract

Summary

Overall case deals with:

Foreign Exchange Market

Sport rate

Forward Contract for hedging

INTRODUCTION

Q:1: Explain how the Sports Exports Company could utilize the spot market to facilitate the

exchange of currencies?

Utilize spot market for immediate exchange at a spot rate

Would have an account with a commercial bank which will convert pounds into dollars at the spot rate

For example, Sports Export Co. get monthly £100,000-When, £1=$1.50- £100,000 = 100,000 X $1.50 = $150,000

ANSWER

In spot market the banks maintain an inventory of various currencies. So, MNC can exchange their currencies with another currency whenever they want.

Spot market can provide liquidity of currencies as a result MNC’s can exchange the currencies at reasonable rate in favour of their profit.

Q: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?

The Sports Exports Company is exposed to exchange rate risk, because the value of the British pound will change over time. If the pound depreciates over time, the payment in pounds will convert to fewer dollars.

The Sports Exports Company could engage in a forward contract in which it would sell pounds forward in exchange for dollars. For example, if it anticipated receiving a payment in pounds 30 days from now, it could negotiate a forward contract in which it would sell pounds in ex.change for dollars at a specific forward rate.

Answer

FORWARD MARKET: The forward market facilitates the

trading of forward contracts on currencies.

FORWARD CONTRACT: A forward contract is an agreement

between a corporation and a commercial bank to exchange a specified amount of a currency at a specified exchange rate (called the forward rate) on a specified date in the future.

When MNCs anticipate future need or future receipt of a foreign currency, they can set up forward contracts to lock in the exchange rate.

The way it could use the forward market to hedge this risk:

As with the case of hedging the risk first comes spot rates, there is a bid/ask spread on forward rates. Forward rates may also contain a premium or discount.If the forward rate exceeds the existing

spot rate, it contains a premium.If the forward rate is less than the

existing spot rate, it contains a discount.

Explanation......

annualized forward premium/discount :

= forward rate – spot rate *(360/n)

Spot rate

where n is the number of days to maturity Example: Suppose £ spot rate = $1.681, 90-day £ forward rate =

$1.677. $1.677 – $1.681 x 360 = – 0.95%

$1.681 90 So, forward discount = 0.95%  Thus, The forward premium/discount reflects the difference between

the home interest rate and the foreign interest rate, so as to prevent arbitrage and hedge the risk.

 

Hypothetical example

The forward contract can hedge future receivables or payables in foreign currencies to insulate the firm against exchange rate risk.

Yet, in this case, the sports exports Company should not hedge if it would benefit from appreciation of the pound when it converts the pounds to dollars

the sports exports Company should hedge if it would not benefit from depreciation of the pound when it converts the pounds to dollars

Recommendation....

As we have explored, FOREX has many different functions, but most importantly, allows international business to be a reality. Without FOREX trade, investments, and purchases could not be possible. FOREX has proven to be valuable to the international community. Although we do not use a gold standard to define the exchange rates between nations and there are many positive and negative aspects to having a gold standard, it has played a vital role in how FOREX has developed.

Conclusion...

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