SMALL BUSINESS DILEMMA
Hedging the Sports Exports Company’s Economic Exposure to Exchange Rate Risk
Jim Logan, owner of the Sports Exports Company, remains concerned about his exposure to exchange rate risk. Even if he hedges his transactions from 1 month to another, he recognizes that a long-term trend of depreciation in the British pound could have a severe impact on his firm. He believes that he must continue to focus on the British market for selling his footballs. However, Logan plans to consider various ways in which he can reduce his economic exposure. At the current time, he obtains material from a local manufacturer and uses a machine to produce the footballs, which are then exported. He still uses his garage as a place of production and would like to continue using his garage to maintain low operating expenses.
1. How could Logan adjust his operations to reduce his economic exposure? What is a possible disadvantage of such an adjustment?
2. Offer another solution to hedging the economic exposure in the long run as Logan’s business grows. What are the disadvantages of this solution?