Diva Shoes Inc. Harvard Case Solution & Analysis

Diva Shoes Inc. Case Study Solution

Evaluation of Alternatives

Both the alternatives can be evaluate don the basis of whether the contact contains a right or an obligation? What would be the initial fees for getting into the contract? And the most important, what is the premium or loss of the option. All these metrics for both of the alternatives are given in the following table;

Table-1

  Alternative 1: Forward Contract

 

Alternative 2: Put Option

 

Right/Obligation Obligation Right
Initial Fees Low High
Premium 208570 11784

It can be seen from the above table that the Forward Contract would have a high premium than the Put Option, along with it, it would have low initial cost as compare to put option. However, under forward option the company would have an obligation to sale the Yen at a specified price. The company’s expectations about Yen depreciation may prove to be fail.

Recommendations

On the basis of above evaluation of the situations and bot of the hedge contracts, the company is recommended to consider forward contract for hedging its currency risk. The forward contract has a high premium and a low initial costs as compare to Put Option. Although, it has the risk that whether the expectations of the company about Yen would be proved right or not, but the current situations of returning investors back to the US  markets force the company to consider a hedge contract, and the better option for the company is forward contract.

Conclusion

Although, currently Yen is appreciating against USD, but it could be depreciated against USD in near future due to the return of investors back to the US markets. Therefore, the company should consider a hedge contract and the recommended option for the company is forward contract.

 

Exhibits

Exhibit A: Currency Risk

Risk Exposure
Expected Revenues in JPY 1803519043
Current Spot Rate 89.6
Revenues in US $  $ 20,128,561
Spot Rate Increased 95
Revenue in USD  $ 18,984,411
Currency Risk  $   1,144,150

Exhibit B: Forward Option Analysis

Profit (Loss) on 9/28/1995  
Contract Value 1803519043
Spot Rate at Maturity 95.00
Forward Rate 6 months 91.0216598
Profit (Loss) on 9/28/1995 208570

Exhibit C: Put Option Analysis (Black Scholes Model)

Put option Price 6.53393E-06
Contract value 1803519043
Put Option Intrinsic Value -0.001260714
Time Value 0.001267248
Option Premium 6.53393E-06
Total Option Premium 11784

 

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