CASE: DIVA SHOES, INC.
1. What are Diva’s projected profits for the fiscal year ending September 1995?
2. What factors affect a firm’s exposure to exchange-rate risk? How much exposure to exchange-rate risk does Diva Shoes have in April 1995?
3. Suppose that Diva chooses to hedge its exposure in yen using the forward contract described in case Appendix A or the currency option described in case Appendix B. Assume that you lock in these contracts at the forward price implied by interest-rate parity for September 1995. Draw the payoffs to the position at maturity for each alternative with the exchange rate defined in USD/JPY × 10,000 units (i.e., the same units as the currency option is quoted). What do you see as the trade-offs between the alternatives?
4. Do you think Bisno should remain strictly a shoe salesman or do you favor hedging his exposure? If you favor hedging, which alternative would you recommend to him?
5. You have carefully assessed the situation at Diva Shoes; how serious is the firm’s exposure to exchange-rate risk?
6. What factors significantly increase the firm’s exposure? Decrease the firm’s exposure?
7. In your opinion, is the exposure large enough to warrant hedging? If so, do you favor hedging via a forward contract or currency option?
8. Complete your paper with a conclusion and references. APA format.
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