Assessment by the Sports Exports Company of Factors That Affect the British Pound's Value

Because the Sports Exports Company (a U.S. ?rm) re- ceives payments in British pounds every month and converts those pounds into dollars, it needs to closely monitor the value of the British pound in the future. Jim Logan, owner of the Sports Exports Company, expects that in?ation will rise substantially in the

United Kingdom, while in?ation in the United States will remain low. He also expects that the interest rates in both countries will rise by about the same amount.

1. Given Jim's expectations, forecast whether the pound will appreciate or depreciate against the dollar over time.

2. Given Jim's expectations, will the Sports Exports Company be favorably or unfavorably affected by the future changes in the value of the pound?

The website of the Federal Reserve Board of Governors provides exchange rate trends of various currencies. Its address is http://www.federalreserve.gov/releases/.

1. Click on the section "Foreign Exchange Rates" monthly. Use this Web page to determine how ex- change rates of various currencies have changed in recent months. Note that most of these currencies (except the British pound) are quoted in units per dollar. In general, have most currencies strength- ened or weakened against the dollar over the last 3 months? Offer one or more reasons to explain the recent general movements in currency values against the dollar.

2. Does it appear that the Asian currencies move in the same direction relative to the dollar? Does it appear that the Latin American currencies move in the same direction against the dollar? Explain.

3. Go to http://www.oanda.com/convert/fxhistory. Obtain the direct exchange rate ($ per currency unit) of the Canadian dollar for the beginning of each of the last 12 months. Insert this informa- tion in a column on an electronic spreadsheet. (See Appendix C for help on conducting analyses with Excel.) Repeat the process to obtain the direct ex- change rate of the euro. Compute the percentage change in the value of the Canadian dollar and the euro each month. Determine the standard devia- tion of the movements (percentage changes) in
the Canadian dollar and in the euro. Compare the standard deviation of the euro's movements to the standard deviation of the Canadian dollar's move- ments. Which currency is more volatile?