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Propose to hedge against this exchange rate risk

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The Arsenal Football Club in London has 4 remaining annual payments of 20 million Euros to French club Lille for acquiring its player Nicolas Pépé.

The CFO of Arsenal worries about the future exchange rate between GBP and Euro when those payments are due. The CFO is considering converting British Pounds to Euros today and saving those Euros in banking to avoid future unfavorable exchange rate moves.
A staff points out that the Bank of England interest rate is 0.75% while the European Central Bank interest rate is -0.5%. Converting British Pounds to Euros today and save Euros at lower rate seems a bad idea. The staff suggests that the CFO should instead sign forward contracts to lock in the future exchange rate, which can also eliminate future exchange rate risk.

Question:

1. The CFO of Arsenal asks you to evaluate these two options. State your assumptions clearly in your answer. Try your best to be comprehensive and include possible future scenarios in your analysis.

2. What are the other tools you can propose to hedge against this exchange rate risk? How are they different from the two options discussed above?

Reference no: EM132674565

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