Use of the Foreign exchange Markets by the Sports Exports company

1.MD. ASHFAQ UDDIN KHAN

2009-2-10-307 2.lalun nahar tonny 2008-3-10-040 3.SABRINA SHARMIN KHAN 2008-3-10-059 4. NUSRAT NAWREEN 2008-3-10-103 5.ABDULLAH KAMAL 2009-3-10-056 6.SYED EBNA AL KAWSAR 2008-2-10-179

Sports exports company Spot market utilization Using forward contract

 Overall case deals with: Foreign Exchange Market Sport rate

Forward Contract for hedging

 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 100,000When, 1=$1.50100,000 = 100,000 X $1.50 = $150,000

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 MNCs 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.

 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.

 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.

 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.

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

 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.