As a follow up to the first case below, please help with answers for the second set of questions 1-3 ONLY - "Assessment of Exchange Rate Exposure."Thanks.

Small business dilemma

Exchange rate forecasting

The Sports Exports Company converts British pounds into dollars every month. The prevailing spot rate is about $1.65, but there is much uncertainty about the future value of pound. Jim Logan, owner of the Sports Exports Company, expects that British inflation will rise substantially in the future. In previous years when British inflation was high, the pound depreciated. The prevailing British interest rate is slightly higher than the prevailing U.S interest rate. The pound has risen slightly over each of the last several months. Jim wants to forecast the value of the pound for each of the next 20 months.

1.Explain how Jim can use technical forecasting to forecast the future value of the pound. Based on the information provided, do you think that a technical forecast will predict future appreciation or depreciation in the pound?

2.Explain how Jim can use fundamental forecasting to forecast the future value of the pound. Based on the information provided, do you think that a fundamental forecast will predict appreciation or depreciation in the pound?

3.Explain how Jim can use a market-based forecast to forecast the future value of the pound. Do you think the market-based forecast will predict appreciation, depreciation, or no change in the value of the pound?

4.Does it appear that all of the forecasting techniques will lead to the same forecast of the pound's future value? Which technique would you prefer to use in this situation?

Please answer this section ONLY

Small Business Dilemma

Assessment of Exchange Rate Exposure

At the current time, the Sports Exports Company is willing to receive payments in British pounds for the monthly exports it sends to United Kingdom. While all of its receivables are denominated in pounds, it has no payables in pounds or any other foreign currency. Jim Logan, owner of the Sports Exports Company, wants to assess his firm's exposure to exchange rate risk.

1.Describe the exposure of the Sports Exports Company to exchange rate risk as transaction exposure? Economic exposure? Translation exposure?

2.Jim Logan is considering a change in the pricing policy in which the importer must pay in dollars, so that Jim 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 Jim 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 Jim retained his original policy of pricing the exports in British pounds?