Question Details

How could he use a currency swap 



Long-Term Financing Decision by the Sports Exports Company
The Sports Exports Company continues to focus on producing footballs in the U.S. and exporting
them to the United Kingdom. The exports are denominated in pounds, which has continually exposed
the firm to exchange rate risk. It is now considering a new form of expansion where it would sell
specialty sporting goods in the U.S. If it pursues this U.S. project, it would need to borrow long-term
funds. The dollar-denominated debt has an interest rate that is slightly lower than the pounddenominated
debt.
1. Jim Logan, owner of the Sports Exports Company, needs to determine whether dollardenominated
debt or pound-denominated debt would be most appropriate for financing this
expansion, if he does expand. He is leaning toward financing the U.S. project with dollardenominated
debt, since his goal is to avoid exchange rate risk. Is there any reason why he should
consider using pound-denominated debt to reduce exchange rate risk?
2. Assume that Jim decides to finance his proposed U.S. business with dollar-denominated debt if he
does implement the U.S. business idea. How could he use a currency swap along with the debt to
reduce the firm- exposure to exchange rate risk?




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