Long-Term Financing Decision by the Sports Exports Company
The Sports Exports Company continues to focus on producing footballs in the United States and exporting them to the United Kingdom. The exports are denomi- nated 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 United States. If it pursues this U.S. proj- ect, it will need to borrow long-term funds. The dollardenominated debt has an interest rate that is slightly lower than the pound-denominated debt.
1. Jim Logan, owner of the Sports Exports Company, needs to determine whether dollar-denominated 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 dollar-denominated 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 re- duce the ﬁrm’s exposure to exchange rate risk?