Chapter 16
International Sport Finance
Chapter Overview
I. Introduction
II. Open and Closed Leagues
a. Promotion and Relegation
b. Financial Effects of Promotion
III. Open Leagues and Multiple Competitions
i. Multiple Competitions and Prize Structures
1. Tournament theory
IV. Ownership and Expansion
a. The Soccer Business Boom
i. Private company limited by shares
ii. Conglomerate
b. Financial Fair Play
V. Transfers and Player Movement
a. Academy
b. Transfer
VI. Exchange Rates
Key Concepts
When reading this chapter, students should focus on the following key concepts:
1. Sport leagues from North America are in constant competition with other international
teams and leagues, both directly in the same markets, as well as in competing for other
resources.
2. There are differences in ownership styles and league policies between North America
and the rest of the world, such as promotion and relegation systems or player transfers
in the international scene.
Concept Check Responses
1. What is an open sport league? How does it differ from a closed league in terms of
structure and organization?
An open sport league is one that allows teams the ability to enter the league without
2. What advantages does the open league system have over the closed league system?
There are a number of advantages in using the open league system. To begin with,
because open leagues do not require expansions fees, it provides the ability for
3. What are the disadvantages in using the open league system compared to closed
leagues?
Many of the disadvantages in a closed league system come from the same sources as
the advantages. First, while open leagues have less barriers to entry for teams who want
4. What is the promotion and relegation system? Comparing it to the systems used in
closed leagues, what type of advantages does it have? What are its disadvantages?
The promotion and relegation system is a mechanism used in open leagues that moves
5. What are parachute payments, and why are leagues around Europe adopting this
mechanism?
A parachute payment is a revenue payment based on television rights deals that are
paid out to teams that are demoted from the top league in a country to the second
6. What are yo-yo (or elevator) clubs, and what problems does their existence pose for
professional sport leagues?
Yo-yo clubs are teams that bounce back and forth between two divisions. Yo-yo clubs
pose a problem because they often are at a level where they are not good enough to
maintain their presence in the higher division, but at the same time are better than
7. What is administration, and why has it become a problem in recent years, especially in
professional soccer in Europe?
Administration is when a soccer club becomes insolvent and is taken over by a financial
administrator. The financial administrator, who is often an accountant, will be in charge
8. Similarly, why are professional teams in promotion and relegation leagues more likely to
go into administration when compared to their North American counterparts?
To begin with, because most North American professional sport leagues have some type
of mechanism to restrict spending on salaries (salary cap and/or luxury tax) they are
able to keep the costs of players relatively low. However, as such mechanisms have not
9. Why do teams in closed league tend to not participate in multiple competitions? Please
provide details in regard to why there is a lack of participation.
Teams in closed leagues do not participate in multiple competitions, because the
leagues they plan in typically only have one competition per season. One reason for the
10. What is tournament theory? Why it is important for professional sport leagues to be
aware of tournament theory?
Tournament theory is the concept that efforts of teams and competitors will be based
on the prize money that is available to them. Tournament theory is important because it
11. What are socios (or memberships), and how are they different from other types of sport
team ownership?
Socios are sports teams that are organized in a way that the members of the clubs are
the owners. That is, individuals are allowed to pay for a yearly membership in a club,
12. Describe the “supporters’ trust” ownership of sport teams, and why has this method of
ownership become popular in recent years?
The supporters’ trust style of ownership is where teams are owned by a non-profit
organization that is created and operated by the supporters of a club. Notably, a
supporters’ trust operates somewhat similar to a socio, except there are not yearly
13. What is the difference between a “protest” club and a phoenix club?
A protest club is a new team that is created by the fans of a club they have grown
disillusioned with for various reasons, such as relocation to new locations or alienation
14. What is a conglomerate, and how has it changed the landscape of professional soccer
around the world?
A conglomerate is a business that is composed of several corporations to form a large
powerful unit. Conglomerates have changed the landscape of professional soccer by
purchasing teams in different leagues around the world. In this manner, they essentially
15. Why did UEFA create the Financial Fair Play rules?
UEFA created Financial Fair Play rules in response to teams backed by large
16. What is the hybrid system of professional sport? Do these leagues strictly copy the
leagues they adopt practices from?
The hybrid system of professional sport is when the sport leagues in a country follow
17. What are some advantages to a professional sport league having been formed from an
industrial league? What are some disadvantages?
The first advantage of having been formed from an industrial league is that it provides a
strong group of financial investors who are part of the league. Additionally, because of
18. What is a transfer? How does it operate different from the system of player movement in
North American professional sport leagues?
A transfer is where one sport team obtains a player by purchasing them from another
19. What is a Bosman transfer? Why is the Bosman transfer important in European soccer?
A Bosman transfer is a free transfer. That is, it is a type of transfer where a player who is
20. What is third-party ownership, and what problems does it pose for professional soccer?
Third-party ownership is when a third-party other than the player or a club owns the
economic rights to a player. In most cases, third-party ownership of a player is either
21. What is the nominal exchange rate? What type of important information does this value
provide?
The nominal exchange rate is the exchange rate value that is listed on the market. For
22. What is the real exchange rate? How does it differ from the nominal exchange rate?
Why is it important for organizations involved in international business to be able to
understand this rate?
The real exchange rate calculates the difference in value between a good in two
countries based on that day’s exchange rate. This value reflects the difference that
Responses to Practice Problems
1. On June 1st, the Euro was trading at 1 to 1.12 US Dollars. A professional sport team in
the U.S. negotiating a contract with a free-agent from Europe offered the player
$10,000,000.
a. Please calculate the player’s value on that day using the nominal exchange rate.
Value = 1/1.12 * 10,000,000 = 8,928,571 Euros
c. If the exchange rate had remained at 1 to 1.12 (Euros to USD), how much more
would the team need to have paid the player?
9,000,000 = USDSalary * 1/1.12
USD Salary = 9,000,000/(1/1.12)
= 9,000,000/0.89286
= 10,079,967
= 10,000,000 – 10,079,967 = -79,967
The team would have had to pay $79,967 more if the exchange rate had stayed
the same.
2. On May 27th, 2016 before the Brexit vote occurred in England, the pound was trading at
1 = 1.46 USD. A company in the U.S. selling a device that allows teams to track the
movement of players had priced the system at $3,000,000 USD, and was also selling the
device at 2.1 million pounds in the U.K.
a. Based on this information calculate the real exchange rate for this device.
b. Based on the real exchange rate that was just calculated, is the product cheaper
or more expensive in the U.S.?
Because the real exchange rate of 0.9784 is less than 1, it means that the
product is cheaper in the U.S.
d. Comparing the real exchange rate from June to the one in October, how has the
value of the product changed? Is this good or bad for the company?
The real exchange rate has increased from 0.9784 to 1.17, meaning that the
value of the product has gone from being cheaper in the U.S. to more expensive
0.9874 = ((1/1.22) * 3,000,000)/UKPrice
0.9874 = (0.81967 * 3,000,000)/UKPRICE
UKPrice * 0.9874 = (0.81967 * 3,000,000)
The new UK Price for the product should be 2,490,389.
f. Reconsidering, the company has now decided that they would like the price in
the U.S. to be equivalent to that in the U.K., and thus should have a real
exchange rate of 1. Based on this calculate the new U.K. price, assuming the US
price is 3,000,000 and the exchange rate is 1 pound to 1.22 USD.