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Diva Shoes Inc Case Solution
There are therefore a number of options that Diva shoes can use to hedge its risks in Franc and Japanese yen. It can opt for currency forward contract, which would allow it to lock in a rate at the spot time. Hence, any further appreciation of yen or franc in future would no longer adversely impact on the revenue of the company. Hence, Diva Shoes would know the exact amount it would receive at the end of the forward contract (Abanomey & Mathur, 2001). However, if the Japanese yen or franc depreciates, Diva shoes would have to suffer a loss.
Case Analysis for Diva Shoes Inc
The forward exchange rate for JPY/USD has been calculated as follows:
Spot Rate |
89.6 |
Japan's Interest Rates |
5% |
US Interest Rate |
8.54% |
Forward Rate |
86.40531 |
On the basis of the above calculations and the given spot rates for various currencies, the dollar amount has been calculated as follows for the projected revenue in 1995:
|
Revenue In Respective Currencies |
Spot Rate |
Revenue In Dollars |
Franc |
14,010,000 |
5 |
2,802,000 |
Italian Lira |
7,909,729,000 |
1,620 |
4,882,549 |
Canadian Dollar |
17,123,000 |
1.26 |
13,589,683 |
Japanese Yen |
1,803,519,043 |
86.4053068 |
20,872,781 |
Hence, the total projected revenue for 1995 is as follows:
Projected Revenue for 1995 |
|
Revenue in USD |
9,000,000 |
Francs in USD |
2,802,000 |
Italian Lira in USD |
4,882,549 |
Japanese Yen in USD |
20,872,781 |
Total USD |
37,557,330 |
The revenue sensitivity to the exchange rate has been evaluated through the sensitivity analysis which is shown through the following graph:
From the above graph, it can be seen that the slope of the line is steep. This indicates that a 0.1 depreciation in yen against the dollar would result in a significant change in the revenue. Hence, the revenue earned from the Japanese market is highly sensitive to the US dollar movements.
The exchange rate exposure for the firm during the month of April, 1995 is quite significant and is as follows:
In Francs |
13,555,222 |
In Lira |
7,865,409,172 |
In Canadian Dollar |
12,846,000 |
In Japanese Yen |
1,643,233,000 |
Looking at the values of the revenue in various currencies, it can be inferred that the exposure for the company is huge. Also, Exhibit 1 further helps understand the volatility of various currencies against the US dollar. While Franc and Japanese Yen indicates an appreciating trend against the USD, Italian Lira has shown high fluctuations and is currently depreciating against the dollar.
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