Cash Management at the Sports Exports Company

1. If Jim invests the excess cash in U.S. Treasury bills, would this reduce the firms exposure to
exchange rate risk?
2. Jim decided to use the excess cash to pay off the British loan. However, a friend advised him
to invest the cash in British Treasury bills, stating that the loan provides an offset to the pound
receivables, so you would be better off investing in British Treasury bills than paying off the
loan. Is Jims friend correct? What should Jim do?MINI CASE

Ever since Jim Logan began his Sports Exports Company, he has been concerned about his
exposure to exchange rate risk. The firm produces footballs and exports them to a distributor in
the United Kingdom, with the exports being denominated in British pounds. Jim has just entered
into a joint venture in the United Kingdom in which a British firm produces sporting goods for
Jims firm and sells the goods to the British distributor. The distributor pays pounds to Jims firm
for these products. Jim recently borrowed pounds to finance this venture, which created some
cash outflows (interest payments) that partially offset his cash infl;ows in pounds. The interest
paid on this loan is equal to the British Treasury bill rate plus 3 percentage points. His original
business of exporting has been very successful recently, which has caused him to have
revenue (in pounds) that will be retained as excess cash. Jim must decide whether to pay off
part of the existing British loan, invest the cash in the U.S. Treasury bills, or invest the cash in
British Treasury bills.

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Cash Management at the Sports Exports Company
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