Assessment of Exchange Rate Exposure by the Sports Exports Company
At the current time, the Sports Exports Company is willing to receive payments in British pounds for the monthly exports it sends to the United Kingdom. Although all of its receivables are denominated in pounds, it has no payables in pounds or in any other foreign currency. Jim Logan, owner of the Sports Exports Company, wants to assess his firm’s exposure to exchange rate risk.
1. Would you describe the exposure of the Sports Exports Company to exchange rate risk as transaction exposure? Economic exposure? Translation exposure?
2. Logan is considering a change in the pricing policy in which the importer must pay in dollars so that Logan will not have to worry about converting pounds to dollars every month. If implemented, would this policy eliminate the transaction exposure of the Sports Exports Company? Would it eliminate Sports Exports’ economic exposure? Explain
3. If Logan decides to implement the policy described in the previous question, how would the Sports Exports Company be affected (if at all) by appreciation of the pound? By depreciation of the pound? Would these effects on Sports Exports differ if Logan retained his original policy of pricing the exports in British pounds?