Question: In January 1988, Arco bought a 24.3% stake in the British oil firm Britoil PLC. It intended to buy a further $1 billion worth of

In January 1988, Arco bought a 24.3% stake in the British oil firm Britoil PLC. It intended to buy a further $1 billion worth of Britoil stock if Britoil were agreeable. However, Arco was uncertain whether Britoil, which had expressed a strong desire to remain independent, would accept its bid. To guard against the possibility of a pound appreciation in the interim, Arco decided to convert $1 billion into pounds and place them on deposit in London, pending the outcome of its discussions with Britoil's management. What exchange risk did Arco face, and did it choose the best way to protect itself from that risk?

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