Tag Archives: Hedging

A case study about hedging

A spanish professional football team plans to play an exhibition game in the United Kingdom next year. Assume that all expenses will be paid by the British government, and that the team will receive a check for £1million. The team anticipates that the pound will depreciate substantially by the scheduled date of the game. In addition, the football authorities must approve the deal, and approval will not occur for 3 months. How can the team hedge its position? What is

Hedging

Hedging refers to the avoidance of a foreign exchange risk, or the covering of an open position. For example, the importer could borrow $100,000 at the present spot rate of SP=$2/£1 and leave this sum on deposit in a bank (to earn interest) for three months, when payment is due. By so doing, the importer avoids the risk that spor rate in three months will be higher than today’s spot rate and that he or she would have to pay