Assessing Exchange Rate Risk Exposure for Sports Exports Company

In the realm of international trade, managing exchange rate risk is a critical aspect that businesses need to navigate effectively. Sports Exports Company, a firm dealing with exports to the United Kingdom, finds itself at a juncture where understanding its exposure to exchange rate fluctuations is imperative for strategic decision-making. Let us delve into the various dimensions of exchange rate risk exposure that the company might encounter and how potential policy changes could impact its risk profile.

1. Types of Exposure:

When evaluating the exposure of Sports Exports Company to exchange rate risk, we can identify the following types of exposures:

Transaction Exposure:

Transaction exposure pertains to the potential impact of exchange rate fluctuations on the company’s financial obligations denominated in foreign currency. In this case, since all receivables are in British pounds, the company faces transaction exposure if the pound-dollar exchange rate fluctuates significantly before conversion.

Economic Exposure:

Economic exposure, also known as operating exposure, refers to the impact of exchange rate movements on the company’s overall competitiveness and cash flows. It arises from changes in exchange rates affecting the demand for products or input costs. For Sports Exports Company, economic exposure would be relevant if exchange rate fluctuations influence market demand for its exports or cost of production.

Translation Exposure:

Translation exposure arises when a company consolidates financial statements that are denominated in foreign currencies. As Sports Exports Company does not have payables in pounds or any other foreign currency, translation exposure may not be a significant concern at present.

2. Impact of Pricing Policy Change:

If Logan decides to shift the pricing policy to require importers to pay in dollars instead of pounds, it could have the following effects:

Transaction Exposure:

Changing the pricing policy to dollar-denominated transactions would indeed eliminate transaction exposure related to converting pounds to dollars every month. The company would no longer be directly impacted by pound-dollar exchange rate fluctuations when receiving payments.

Economic Exposure:

While the elimination of transaction exposure is achieved through the new pricing policy, economic exposure may still persist. Changes in exchange rates can influence the competitiveness of Sports Exports Company’s pricing in the UK market or affect demand for its products based on currency fluctuations.

3. Effects of Exchange Rate Movements:

In the scenario where the company shifts to pricing exports in dollars:

– Appreciation of Pound:

– Positive Impact: If the pound appreciates against the dollar, the company may receive higher revenue when converted to dollars.
– Negative Impact: On the flip side, an appreciating pound could potentially make Sports Exports Company’s products more expensive for UK consumers, impacting demand.

– Depreciation of Pound:

– Positive Impact: A depreciating pound could make the company’s exports more competitive in the UK market, potentially boosting sales volume.
– Negative Impact: However, it could also lead to lower revenue in dollar terms when converting payments back to the home currency.

The effects of exchange rate movements on the company would differ if Logan retained the original policy of pricing exports in British pounds. In that scenario, changes in pound-dollar exchange rates would directly impact the company’s revenue and cash flows due to transaction exposure.

In conclusion, while shifting to dollar-denominated pricing can mitigate transaction exposure for Sports Exports Company, understanding and managing economic exposure remains crucial for long-term competitiveness and profitability amidst exchange rate fluctuations. Logan’s decision regarding the pricing policy should be informed by a comprehensive assessment of both transactional and economic implications to safeguard the company’s financial health in an increasingly globalized market environment.