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Foreign Exchange

Currency risk: Going for gold or going for broke?

The 2012 London Olympics are likely to go over budget because of FX risk

Although most of the UK population warmly welcomed the award of the 2012 Olympic Games to London, a few have expressed concern about its cost. This is not surprising, modern Olympics have after all frequently cost more than originally estimated. The 2004 Athens Games, for example, went more than $1.7 billion over budget.

A glance at the detailed budget of the London Organizing Committee for the Olympic Games (Locog) will immediately raise concerns among the doubters. Locog says the "forecast budget... has been prepared in a prudent manner with a conservative revenues forecast, cautiously projected expenditure and a contingency of $105 million." Locog's total budget is put at $2.462 billion, which covers expenditure on running the Games, not the cost of investment in new infrastructure.

What seems really odd about the budget is not necessarily its denomination in dollars, even though most revenue and expenditure is in sterling, but the sterling/dollar rate chosen. This was set at $1.60 when the budget was finalized in October 2004.

At the time, the rate was around $1.84, pretty much where it is at the moment. So Locog's budget, in sterling, was set at £1.538 billion. If it is assumed this sterling budget remains constant, the dollar cost is now $2.831

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