Presentation On

Small Business Dilemma: Hedging the

Sports Exports Companys Economic
Exposure to Exchange Rate Risk

Presented by:
Ashutosh Singh (Roll No.-11)
Debasis Panda (Roll No.-13)
Deepanshi Gupta (Roll No.-14)
Divya Suhag (Roll No.-15)
Gopal Tripathi (Roll No.-16)
Gurpreet Singh (Roll No.-17)
Ivneet Singh (Roll No.-18)

Case Study in Brief Gopal

Operational Strategies for

Managing Economic
Exposure

CASH INFLOW

CASH OUTFLOW

Importing Supplies: Import raw

material from U.K. so that he would
have some payables in pounds to
offset some of the receivables in
pounds.
Pricing Policy: Setting the price that
maximizes dollar profits to the firm.
Market Selection: Look for other
export markets to offset the
depreciation in pound.
Diversifying Operations: Look for
importing manufactured goods from
U.K. so as to balance the Pound
inflow with outflow.
Plant Location: Manufacturing units
in location having lower cost of
production.

Currency Forward
Is

an agreement between two parties to exchange fixed amount of one

currency for another at an agreed upon future date with an exchange rate
fixed at the time of agreement.
Lets assume that the U.S. sports company just delivered footballs and is
expecting a payment of 1,00,000 over six months
The current spot rate is $1.60/1 so exporter would expect to get $1,60,000
but as per the case the is expected to depreciate over next six months to
$1.56/ exporter would actually get $1,56,000, $40000 less than originally
expected.
So he enters the forward agreement with a bank with a agreed exchange
rate of $1.595/1 at( t=0).At (t=180) the exporter will deliver bank an
amount of 1,00,000. The bank will deliver $1,59,500.
If the exchange rate rises to $1.61/1 then exporter foregoes the
appreciation of$.1 over original spot rate. Also if the exporter gets a default
from the UK buyer still has to deliver to the bank 1,00,000 as per
agreement.TO MANAGE THE DOWNSIDE RISK POTENTIAL GAIN IS
SACRIFICED.

FUTURES AND OPTIONS

The exporter can write futures ( go short) at $1.60/1 for six

months and as expected if the exchange rate falls to and expected

level of $1.56/1 then cover it(go long/square off) making a profit
of $.04/1 and receive the payment of 1,00,000 in six months at
$1.56/1 making a loss of $.04/1.
Buy Put option: Gives the buyer (exporter) the RIGHT but not the
OBLIGATION to deliver (SELL) the underlying ($/) on a specified
future date at a specified exchange rate fixed now ($1.60= 1 ) .
The exporter is under no obligation to exercise option and deliver
underlying at contracted rate.
Will exercise Option and deliver underlying if rate is say $1.56=1
Will not exercise Option if rate is say $1.64=1
Upfront fees payable , depending on volatility of USD/GBP

Divya

Deepashi

Ashutosh

Conclusion - Deb