Small Business Dilemma

Long-Term Financing Decision by the Sports Exports Company

The Sports Exports Company continues to focus on producing footballs in the United States and exporting them to the United Kingdom. The exports are denominated in pounds, which has continually exposed the firm to exchange rate risk. It is now considering a new form of expansion where it would sell specialty sporting goods in the United States. If it pursues this U.S. project, it will need to borrow long-term funds. The dollar-denominated debt has an interest rate that is slightly lower than the pound-denominated debt.

Q. Assume that Logan decides to finance his proposed U.S. business with dollar-denominated debt, if he does implement the U.S. business idea. How could he use a currency swap along with the debt to reduce the firms exposure to exchange rate risk?