Finance Midterm
Midterm – John Doe
Executive summary
Diva shoes is an international shoes company that is experiencing rapid growth. Due to this rapid growth, the company never established a robust hedging strategy to protect itself against fluctuations of the multiple currencies it engages with.
This situation became more severe in Japan. The company’s growth in Japan exceeded all expectations, and unlike other countries in which the company conducted business (Italy for example) the company had almost no expenses there, and had to convert all the Yens it generated from selling its merchandise to dollars.
In the last few years, the Yen appreciated against the dollars, making the company’s lack of hedging strategy have little to no impact on the bottom line. However, there are several signs that suggest that the Yen might become susceptible to weakening due to several geo-political reasons: 1. The weakening of the Mexican peso, which helped depreciate the dollar, was coming to an end. There are some concerns that as the peso go up and Mexico’s economy recovers so will the dollar. 2. There were rumors that due to the increased appreciation of the Yen, the G-7 summit might agree to take steps and prevent its further appreciation. Such intervention will have a direct impact on the Yen/Dollar exchange ratio and might adversely impact the profitability of Diva Shoes.
This was an excellent time, according to Diva’s financial consultant Stone, to hedge Diva’s position on the Yen and lock it at a rate that will guarantee to meet the company’s goal of 15% growth. Stone explored 2 options for hedging, forward contact and options, each with its pros and cons.
By locking the rate using a forward contract, the company is completely protected from severe fluctuation in the exchange rate. The company signs a guaranteed contract in which it commits to selling its Yen at a known rate. This means that regardless of the exchange rate at the time of the transaction, the company knows
Executive summary
Diva shoes is an international shoes company that is experiencing rapid growth. Due to this rapid growth, the company never established a robust hedging strategy to protect itself against fluctuations of the multiple currencies it engages with.
This situation became more severe in Japan. The company’s growth in Japan exceeded all expectations, and unlike other countries in which the company conducted business (Italy for example) the company had almost no expenses there, and had to convert all the Yens it generated from selling its merchandise to dollars.
In the last few years, the Yen appreciated against the dollars, making the company’s lack of hedging strategy have little to no impact on the bottom line. However, there are several signs that suggest that the Yen might become susceptible to weakening due to several geo-political reasons: 1. The weakening of the Mexican peso, which helped depreciate the dollar, was coming to an end. There are some concerns that as the peso go up and Mexico’s economy recovers so will the dollar. 2. There were rumors that due to the increased appreciation of the Yen, the G-7 summit might agree to take steps and prevent its further appreciation. Such intervention will have a direct impact on the Yen/Dollar exchange ratio and might adversely impact the profitability of Diva Shoes.
This was an excellent time, according to Diva’s financial consultant Stone, to hedge Diva’s position on the Yen and lock it at a rate that will guarantee to meet the company’s goal of 15% growth. Stone explored 2 options for hedging, forward contact and options, each with its pros and cons.
By locking the rate using a forward contract, the company is completely protected from severe fluctuation in the exchange rate. The company signs a guaranteed contract in which it commits to selling its Yen at a known rate. This means that regardless of the exchange rate at the time of the transaction, the company knows