Use of the foreign exchange markets by the Sports Exports Company

Each month, the Sports Exports Company (an Australian company) receives an order for Australian Rules footballs from a British sporting goods distributor. The monthly payment for the footballs is denominated in British pounds, as requested by the British distributor. Jim Logan, owner of the Sports Exports Company, must convert the pounds received into Australian dollars. a. Explain how the Sports Exports Company could utilise the spot market to facilitate the exchange of currencies. Be specific.

b. Explain how the Sports Exports Company is exposed to exchange rate risk and how it could use the forward market to hedge this risk.

c. Is it wise for Jim to export footballs in Asian countries in order to reduce exchange rate risk? Explain.

Jim Logan, owner of the Sports Exports Company, is concerned about the value of the British pound over time because his company receives pounds as payment for Australian Rules footballs exported to the United Kingdom. He recently read that the Bank of England (the central bank of the United Kingdom) is likely to intervene directly in the foreign exchange market by buying a massive amount of British pounds to prevent a significant drop in the value of British pounds in response to Brexit-related turmoil.

a. Forecast whether the British pound will weaken or strengthen based on the information provided

. b. How would the performance of the Sports Exports Company be affected by the Bank of England's policy of massive buying of British pounds in the foreign exchange market (assuming that it does not hedge its exchange rate risk)?