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 …show more content…
This calculation also shows that the bottom line (Net Income) is impacted greatly as the Yen appreciates/depreciates. This is a result of the company’s income in Yen that become more/less valuable due to the different exchange rates. This shows that a company can grow its profit in Japan, and lessen its overall profit at the same time (profit in Yen goes up, Yen depreciates, total profit goes down).
The first item that gets hit by the fluctuating rate is the total revenue, since all the other items in the statement are derivatives of that, this change then impact the gross profit, operating profit and at the end, the net income.
6. I would recommend Benjamin to remain a shoe salesman and ignore FX-Risk. Even though this goes against what we learned in class, and might cost me several point in the test, I will do my best to justify the answer:
f. Hedging is not Diva’s shoes core business. They specialize in making shoes and not understanding the financial market and its very complex financial packages. In order to start hedging intelligently, Diva shoes will be required to spend significant resources to either hire in-house financial experts, or outsource