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Diva Shoes Inc Case Solution

Solution Id Length Case Author Case Publisher
2119 686 Words (5 Pages) Susan Chaplinsky Darden School of Business : UV0265
This solution includes: A Word File A Word File and An Excel File An Excel File

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.

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Case Analysis for Diva Shoes Inc Case Solution

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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