Academic journal article International Journal of Sport Finance

Revenue Sharing in Professional Sports Leagues as a Hedge for Exchange Rate Risk

Academic journal article International Journal of Sport Finance

Revenue Sharing in Professional Sports Leagues as a Hedge for Exchange Rate Risk

Article excerpt

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Most professional sports leagues in North America find themselves in the position of operating leagues that span an international border. The National Hockey League (NHL) operates 23 teams in the United States (US) and seven teams in Canada, while Major League Soccer (MLS) operates 19 teams in the US and three teams in Canada. The National Basketball Association (NBA) and Major League Baseball (MLB) each feature only one team in Canada. One is hard pressed to find any other professional sports league in the world that spans an international border.1 The member federations of FIFA, world football's governing body, operate annual tournaments that feature the top private professional teams in each federation, most notably the Champion's League in the European federation (UEFA). Although marketed as leagues, these are not leagues in the usual sense that teams play a regular season schedule, agree to common business practices (e.g., revenue sharing of local revenues, rules regarding player contracts), and compete within the same talent market.

Teams that operate in different countries in the same league are subject to exchange rate risk since the bulk of their revenues are typically in local currency but their payroll costs are in another currency. This is the case in the four North American leagues studied here. Their collective bargaining agreements (CBAs) stipulate that all player salaries are to be paid in U.S. dollars (US$). NHL teams that operate in Canada are particularly vocal about exchange rate risk. Maple Leaf Sports and Entertainment (MLSE)-owner of the Toronto Maple Leafs (NHL), Toronto Raptors (NBA), and Toronto FC (MLS)- calls the exchange rate "one of the toughest risk factors for the company" (Mirtle, 2016, para. 12). The NHL maintained an exchange rate stabilization fund during the 1990s to compensate Canadian teams when negotiating salaries for free agents; however, it now relies on teams to hedge their payroll costs in the futures market (Hobson, 2015). The depreciation in the Canadian dollar (CAD$) amounted to a CAD$32 million increase in payroll costs for the company in 2014. MLSE hedged a total of US$100 million in 2014, just over half of the payroll costs for its three teams, incurring CAD$350,000 in transactions costs (Rubin, 2015). The remaining payroll was leftexposed to exchange risk. The Toronto Blue Jays (MLB) suffered an increase in payroll costs of CAD$25 million in 2014 due to the falling CAD$. The team does not comment on whether it hedges its payroll costs.

The purpose of this paper is to construct a simple model of a professional sports team that faces this mismatch in currencies and show how its profit is affected by exchange- rate exposure. We derive a simple condition that contains local revenue in domestic currency, national revenue and team payroll in another currency, and revenue sharing. Revenue sharing can serve the purpose of at least partially insulating a domestic team from exchange-rate exposure. In fact, it is possible for a domestic team to use revenue sharing and the setting of its payroll to construct a hedge against exchange-rate movements, but it is not likely to be practical since it would require the team to achieve two objectives with only one tool. We close the paper by using some basic financial data for Canadian teams to assess their exchange-rate exposure.

Local Revenues, National Revenues, and Exchange-Rate Exposure

The collective bargaining agreements of the four North American leagues that feature teams in Canada stipulate that all player compensation is to be paid in US$. The largest portion of revenue for these teams is earned in CAD$, composed primarily of gate revenue, concessions, parking, and local TV and media. Revenue from national TV, licensing, logos, apparel, and so on is collected in a central fund in US$ and distributed evenly to each team in the league. The currency composition of team revenue is critical in determining the exchange-risk exposure of the team: the greater the share of revenue collected in CAD$, the greater the exposure. …

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