Small Business Dilemma

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

Because the Sports Exports Company (a U.S. firm) receives
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
• inflation will rise substantially in the United Kingdom,
While
• inflation 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?
 Basic Theories

1 Exchange Rate Equilibrium 2 Factors That Influence Exchange Rates

 Basic Theories continued

3 Relative Inflation Rates 4 Relative Interest Rates

 Basic Theories continued

• Decline in a currency’s value is known as

depreciation
• An increase in currency value is known as
appreciation

5 Real Interest Rates 6 Depreciation / appreciation

 Items to be discussed

a. the pound will appreciate or

depreciate against the dollar ???

It It
• inflation will rise
substantially in the
United Kingdom,

Will • inflation in the United

States will remain low.
Will be
depreciate • interest rates in both
countries will rise by
unfavorable
about the same
amount.

b. favorable or unfavorable ???