Scenario: Jim Logan, the owner of an American based small business, Sports Exports, Inc., specializes in...

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Scenario: Jim Logan, the owner of an American based smallbusiness, Sports Exports, Inc., specializes in exporting footballsto Great Britain. In return, he receives payments in British poundsevery month which need to be converted into dollars. He has noticedthat the exchange rate between the dollar and the pound at the timeof exchange every month is significantly affecting his profits.Since he is a small business owner and not a foreign currencyexpert, he has hired your consulting firm to advise him withrespect to the following matters below. A) Jim Logan recently heardon CNBC that inflation is expected to rise substantially in theUnited Kingdom, while inflation in the United States will remainlow. They also expect that the interest rates in both countrieswill rise by about the same amount. He asks you to answer thefollowing questions so that he may take the appropriate measures ifCNBC is correct in their projections.
1. From an economic perspective, will the pound appreciate ordepreciate against the dollar and explain why?
2. Will Sports Exports, Inc. be favorably or unfavorablyaffected by the future changes and explain why?
3. How can Sports Exports, Inc. use currency futures contractsto hedge against exchange rate risk? Are there any limitations ofusing currency futures contracts that would prevent Sports Exports,Inc. from locking in a specific exchange rate at which it can sellall the pounds it expects to receive in each of the upcomingmonths?
4. How can Sports Exports, Inc. use currency options contractsto hedge against exchange rate risk? Are there any limitations ofusing currency futures contracts that would prevent Sports Exports,Inc. from locking in a specific exchange rate at which it can sellall the pounds it expects to receive in each of the upcomingmonths?
5. While Mr. Logan believes the CNBC report, he would also liketo know what to do if CBNC is incorrect specifically with respectto using futures or options to hedge the exchange rate risk in thisopposing scenario? Are there any disadvantages in thisscenario?

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Scenario: Jim Logan, the owner of an American based smallbusiness, Sports Exports, Inc., specializes in exporting footballsto Great Britain. In return, he receives payments in British poundsevery month which need to be converted into dollars. He has noticedthat the exchange rate between the dollar and the pound at the timeof exchange every month is significantly affecting his profits.Since he is a small business owner and not a foreign currencyexpert, he has hired your consulting firm to advise him withrespect to the following matters below. A) Jim Logan recently heardon CNBC that inflation is expected to rise substantially in theUnited Kingdom, while inflation in the United States will remainlow. They also expect that the interest rates in both countrieswill rise by about the same amount. He asks you to answer thefollowing questions so that he may take the appropriate measures ifCNBC is correct in their projections.1. From an economic perspective, will the pound appreciate ordepreciate against the dollar and explain why?2. Will Sports Exports, Inc. be favorably or unfavorablyaffected by the future changes and explain why?3. How can Sports Exports, Inc. use currency futures contractsto hedge against exchange rate risk? Are there any limitations ofusing currency futures contracts that would prevent Sports Exports,Inc. from locking in a specific exchange rate at which it can sellall the pounds it expects to receive in each of the upcomingmonths?4. How can Sports Exports, Inc. use currency options contractsto hedge against exchange rate risk? Are there any limitations ofusing currency futures contracts that would prevent Sports Exports,Inc. from locking in a specific exchange rate at which it can sellall the pounds it expects to receive in each of the upcomingmonths?5. While Mr. Logan believes the CNBC report, he would also liketo know what to do if CBNC is incorrect specifically with respectto using futures or options to hedge the exchange rate risk in thisopposing scenario? Are there any disadvantages in thisscenario?