Saizeriya and the Use of Foreign Currency Coupon Swaps: Was This For Hedging Or Speculation Harvard Case Solution & Analysis

Saizeriya and the Use of Foreign Currency Coupon Swaps: Was This For Hedging Or Speculation Case Study Solution

Is the bank that sold this swap responsible?

It is imperative e to note that the loss that has been incurred by Saizeriya Co., Ltd. (Saizeriya) has greatly affected the position and reputation of the banks as a whole. Even though, the bank has been generating greater financial benefits from the deal, the position and reputation of the bank would likely be impaired due to the fact that it has been in the media headlines for the longer period of time.

In addition this, Saizeriya Co., Ltd. (Saizeriya) has been contemplating to sue the banks for those losses it generates because of the loss on the derivative instrument. There would be a negative impact of facing the legal proceeding on the future of the bank, there would be many customers who would not agree to enter into the business with the bank due to the impaired integrity and reputation of the bank.

Furthermore, in case the bank would be guilty it would have to pay damages to Saizeriya Co., Ltd. (Saizeriya), the penalties would also be probable that the regulatory authority would imposed if it would found on the wrong side of the law. In doings so, the the confidence and the financial state of the bank would be improved due to the gain from the deal with Saizeriya Co., Ltd. (Saizeriya). Also, it can be stated that the bank might not be wrong because it has owned the fiduciary duty to its shareholders to maximize their wealth.

Is this hedging or speculation?

Most importantly, the risks associated with the foreign coupon currency swap includes the floating rate of interest tend to represent the greater cost and to mitigate this risk, the longer term periods are usually favored.

In addition to this, it is tough task to decide whether the derivative had for speculations or hedging in this case, it is because of the fact that the financial instrument’ characteristics are of speculative nature but the company’s management has perceived derivate for hedging technique purposes.  It is to state that the moore derivative instrument are available which includes currency options, future and forward rate agreements to the company which can be viewed less risky for the Saizeriya Co., Ltd. (Saizeriya). The company’s management has decided to use the hedging for payments received from Australia by using the foreign exchange which had eventually proven to be devastating for Saizeriya Co., Ltd. (Saizeriya). Also, the foreign currency copupon swap has immensely given higher returns to the company as compared to other heading techniques that the company could have chosen between them.

By going through the definition and the nature of the hedging instrument, it is identified that the hedging technique are not responsible to maximize returns, but to minimize risks. It is stipulated that the Saizeriya Co., Ltd. (Saizeriya)’s management have pondered to reduce the likelihood but intended to increase the profit as well as returns generated from the derivative financial instrument. There is a possibility that the company’s management has been seeking to only maximize the gains gained from choosing the riskier financial instrument. Shortly, the foreign coupon currency swap was a speculative financial instrument and it had used for the speculation purpose or reasons.

Conclusion

To sum up, it is to conclude that the Japanese based Italian restaurant named Saizeriya Co., Ltd. (Saizeriya) had taken by Yasuhiko Shogaki in 1968. Yasuhiko Shogaki had made a stunning public announcement on 9 December, 2008 that the company has incurred a loss amounted to ¥15 billion, caused by the foreign currency coupon swap use. On 10th December 2008, the stock prices of Saizeriya has limited down since the shareholders has been rushing to dump the shares. The coupon exchange risk has resulted in many operational losses which were highlighted on the media and resulted in negative restaurant publicity. Since, the company has made disclosure of the losses being incurred over the period of time, it shows that the company depends its decision on the speculation while it has attempted to hedge speculation risk.  The disclosure led to the significant reduction in price of stock and the company can get out of this situation when it would reduce its operations and lower its reliance on derivative markets to generate profits. There is a possibility that the company’s management has been seeking to only maximize the gains gained from choosing the riskier financial instrument. Shortly, the foreign coupon currency swap was a speculative financial instrument and it had used for the speculation purpose or reasons...........

 

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