How the Company will Use the Spot Market to enable the exchange of Currency
In order for the Sports Export Company to facilitate the exchange of foreign currency by the use of spot market, they should open an account with a commercial bank. As the company receives disbursement in form of pounds at the end of the month, it will deposit the check in a bank that deals with foreign exchange services. Hence, the bank will deposit the check, converting the received British pounds into dollars for the Company at the current spot rate.
How the Company is exposed to Exchange Risk and how it will use Forward Market to Hedge the Risk
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The Export Company is exposed to exchange rate risk; this is because of the decline in value of the British pound over time. The decline in value is as a result of the translation effect in the case where the foreign currency depreciates, this leads to a reduction in the consolidated earnings of the company as the British pounds will convert into lesser dollars. Similarly, as the foreign earnings are exchanged at a standard exchange rate during the fiscal year, low values in the foreign currencies will lead to a reduction in the company’s consolidated earnings. However, the company can use forward market to hedge against such risks. In this case, the firm will opt to sell forward the currency of the firm’s foreign currency. Therefore, if there is depreciation in the foreign currency, the translation loss will be offset by the gains from the forward contract. In this case, if the company anticipates receiving money at the end of the month in form of pounds, they will be in a position to negotiate for forward contracts whereby they will trade the pounds for dollars, hence, hedging against the loss of value of the British pound.
