Premium Essay

Merton Electronics Currency Risk

In: Business and Management

Submitted By DNArmstrong
Words 1279
Pages 6
1. What is the currency risk exposure facing Merton? What dimension is more relevant in the case of Merton: transaction exposure, translation exposure, or economic exposure?
Merton Electronics is a company in the United States that imports from both Japanese and Taiwanese suppliers, to then be distributed nationally. Both suppliers invoice in their local currencies (Japanese Yen and Taiwanese Dollars, respectively). The mechanics of payments are as follows: Merton places an order, and the Asian supplier ships within 60 days. Payments are done 30 days from the end of the delivery month, but the spot price on the last day of the month in which the order is placed is used for the invoice.
In other words, Merton faces a 90-day transaction exposure for each order, which also seems to be the most relevant dimension. Indeed, there does not seem to be obvious translation exposure since this is not an issue of accounting differences. Merton’s competitive position is somewhat affected by this currency risk, but this economic exposure seems of second order compared to the transaction exposure described in the case. 2. In the situation facing Merton Electronics, should currency risk be hedged? Why?
Yes. First, the company is family-owned and nothing in the case seems to indicate that the Merton family was able (or willing) to diversify its portfolio internationally.
Second, Merton Electronics relies on its cash-flows to finance its future investments in new computers, office equipment and fixed assets. Unhedged currency risks could jeopardize and/or force to postpone these investments, thus damaging the value of the company. 3. How much would you hedge?
A quantitative hedging optimization would require us to estimate the optimal hedge ratio. To calculate the optimum hedge ratio we would need to have figures for the standard deviation of the spot and future…...

Similar Documents

Free Essay

Jessey Livermores

...firm do to manage the exchange‐rate risk of foreign‐currency borrowing?  How can  Carrefour use       Carrefour S.A. is a retail corporation located in france. The risk that as business’s  operation or an invesment’s value will be affected by change in exchange rate. Carrefour is  exposed to exchange rate risk because of foreign currency exposure from imported goods.   This risk was being hedge by forward contract. Carrefour has a large exposure risk to the  euro because of their hedging policy.      Merton Electronics Case  2. What is currency‐risk exposure?   How is it measured?      Currency risk exposure is the dollar amount that is at risk if exchange rates move in  an unfavorable direction. A company has currency exposure when the currencies for its expenditures  and revenues are not the same. Future payments or distributions payable in foreign currency carry  the  risk  that  the  foreign  currency  will  depreciate  in  value  before  the  foreign  currency  payment  is  received and converted into US dollars. Although there is a chance for profit, most businesses and  lenders give up that chance in order to eliminate the risk of currency exchange loss. It is measured as  the amount in receivables or payables the company has committed to, for which the exchange rate  has not been determined       A currency is exposed to exchange rate fluctuations to the extent that it is used to  conduct  transactions  with  external  markets.  The  greater  the  proportion  of ......

Words: 460 - Pages: 2

Premium Essay

Cases Questions

...syllabus or other instructions. Table of Contents Page Case: Name and Number, Bruner 5e Note Number I. C12- Best Practices—WACC No Questions II. C2- Bill Miller & Value Trust 2 III. C5- Financial Detective, 2005 Contained in Case IV. C7- Body Shop Intl* Contained in Case, but see page 3 V. C6- Krispy Kreme Doughnuts, Inc. 4 VI. C17- The Investment Detective* Contained in Case VII. C28- Intro. to Debt Policy & Value* No Questions, but review M & M Theory on debt and value of the firm. VIII. HBS Case- “Leveraged Betas and the Cost of Equity No Questions IX. C16- The Boeing 7E 7* 5 X. C26- Jet Blue Airways, IPO Valuation* 6 XI.a C35- Merton Electronics 7 XI.b C36- Carefour S. A.* 8 XI.c C44- Palamon Capital Partners* 9 XII. GM Dividend Policy Negotiation (Information to be provided by Dr. Kiss) * Note: Excel Spreadsheets containing some of the exhibits from the case are available for this case at FIN 620, CASE QUESTIONS DR. KISS Please allow these questions to serve as a guide when you prepare your case write-up in accordance with the syllabus or other instructions Case 2- Bill Miller & Value Trust Suggested Questions for Your Preparation of the Case. 1. How well has Value Trust performed in recent years? In making that assessment, what benchmark(s) are you using? How do you measure......

Words: 1437 - Pages: 6

Premium Essay

Empirical Finance

...comrlocatereconbase Firms, do you know your currency risk exposure? Survey results Claudio Loderer ) , Karl Pichler a a Institut fur Finanzmanagement, UniÕersitat Bern, Engehaldenstrasse 4, Bern 3012, Switzerland ¨ ¨ Abstract This paper surveys the currency risk management practices of Swiss industrial corporations. We find that industrials are unable to quantify their currency risk exposure and investigate possible reasons. One possibility is that firms do not think that they need to know because they use on-balance-sheet instruments to protect themselves before and after currency rates reach troublesome levels. This is puzzling because performing a rough estimate of at least the exposure of cash flows is not prohibitive and could be valuable. Another puzzling finding is that firms use currency derivatives to hedgerinsure individual short-term transactions, without apparently trying to estimate aggregate transaction exposure. q 2000 Elsevier Science B.V. All rights reserved. JEL classification: G15; G30 Keywords: Currency risk exposure; Swiss industrial corporation; On-balance-sheet instruments 1. Introduction This paper surveys the currency risk management practices of Swiss industrial corporations. Many of them sell most of their output abroad and would therefore seem to be heavily exposed to currency risk. In fact, currency risk can be substantial. Between 1978 and 1996, the Swiss franc experienced dramatic swings in relation to major currencies such as the......

Words: 11917 - Pages: 48

Premium Essay

America Online

...You are expecting IBM stock price to go up in next 8 months, however you are not completely sure. So you decide to use just one option, either European call or European put on IBM stock maturing in 8 months to bet on your view about IBM’s stock price prospects. Suppose that the current stock price and the strike price for both call and put on the IBM stock is $50. (a) What option will you invest in? Explain.  Call. Call price will go up if the stock price goes up. The losses are limited by the option premium paid. (b) At what price will you breakeven if both put and call options are sold for the same premium of $5 Breakeven stock price $50+$5 = $55 (c) Assume that the risk free rate is 3% per annum. Also assume that the standard deviation of IBM’s stock return is 30% per year. What is the Black-Scholes value of the option you have identified in part a? Step 1: find d1 and d2 d_1=(ln⁡(50/50)+(0.03+〖0.30〗^2/2)×8/12)/(0.30×√(8/12))=0.2041 d_2=0.2041-0.30×√(8/12)=-0.0408 Step 2: find N(d1) and N(d2) Using the cumulative normal table obtain N(d1) = N(0.20) = 0.5793 and N(d2) = N(-0.04) = 0.4841 Step 3: calculate the call option value c=$50×0.5793-$50×e^(-0.03×(8/12) )×0.4841=$5.2393 (d) What is the time value of the option you have identified in part a? Because the stock price equals the strike price ($50) the total value of the option would consist of time value only, therefore the time value of this option is $5.2393 Problem 2 You anticipate that the......

Words: 2634 - Pages: 11

Premium Essay

Theory & Practice of Regulation of Anti-Money Laundering for Banks & Nonbanks

...Laundering for Banks and NonBanks Hayford Kwesi Annor Manager, Risk & Compliance/AMLRO, ABii National Savings & Loans Ltd. Doctorate of finance student, SMC University, Switzerland. FAAFM, Ch.FE, ACCPA, MBA, BSc, HND Abstract A deregulated financial sector is free to accumulate and allocate funds from anywhere irrespective of the nature, form, intent and source. Without regulatory oversight, this poses zero risk to banks and nonbanks no matter how they finance the capital structure. In the real world, banking is an outcome of interactions between the regulator and the regulated. Regulatory consequences apply for failure to comply with the acceptable standards of best practices of banking regulation which include fines, sanctions, jail terms and revocation of the banking license for willful or non-willful noncompliance. The physical disposal of proceeds of funds’ from crime with aim of separating same, through creation of layers to disguise trails of the source and make it seem legitimate undermines the integrity of the financial system. It is required of the banking sector to build a comprehensive framework that identifies, assesses, monitors, mitigates and reports perceptions of suspicious activities of money launderers under the discipline of the regulator to avoid being sanction for the related offences. This paper reviews theory to link practice towards money laundering risk assessment of banking customers to maintain the......

Words: 4377 - Pages: 18

Free Essay


...of imitation that had developed in the markets within which LTCM operated. As the resulting ‘superportfolio’ began to unravel, arbitrageurs other than LTCM fled the market, even as arbitrage opportunities became more attractive, causing huge price movements against LTCM. Three features of the sociology of arbitrage are discussed: its conduct by people often personally known to each other; the possibility and consequences of imitation; and the limits on the capacity of arbitrage to close price discrepancies. It is suggested that by 1998 imitative arbitrage formed a ‘global microstructure’ in the sense of Knorr Cetina and Bruegger. Keywords: arbitrage; economic sociology; imitation; Long-Term Capital Management (LTCM); globalization; risk. Introduction Of all the contested boundaries that define the discipline of sociology, none is more crucial than the divide between sociology and economics. Despite his synthesizing ambitions, Talcott Parsons played a critical role in reinforcing this divide. The economy, argued Parsons and Smelser, is a ‘differentiated School of Social and Political Studies, University of Edinburgh, Adam Ferguson Building, George Square, Edinburgh EH8 9LL, Scotland. E-mail: Copyright © 2003 Taylor & Francis Ltd ISSN 0308-5147 print/1469-5766 online DOI: 10.1080/0308514032000107583 80R 01mackenzie (ds) Page 350 Thursday, July 24, 2003 3:04 PM 350 Economy and Society sub-system of a more inclusive social......

Words: 16475 - Pages: 66

Free Essay

A Novel Simple but Empirically Consistent Model for Stock Price and Option Pricing

...pricing, which not only has the same analyticity as log-normal and Black-Scholes model, but can also capture and explain all the main puzzles and phenomenons arising from empirical stock and option markets which log-normal and Black-Scholes model fail to explain. In addition, this model and its parameters have clear economic interpretations. Large sample empirical calibration and tests are performed and show strong empirical consistency with our model’s assumption and implication. Immediate applications on risk management, equity and option evaluation and trading, etc are also presented. Keywords: Nonlinear model, Random walk, Stock price, Option pricing, Default risk, Realized volatility, Local volatility, Volatility skew, EGARCH. This paper is self-funded and self-motivated. The author is currently working as a quantitative analyst at J.P. Morgan Chase & Co. All errors belong to the author. Email: or ∗ 1 Electronic copy available at: 2 Huadong(Henry) Pang/J.P. Morgan Chase & Co. 1. Introduction The well-known log-normal model for stock price was first proposed by Louis Bachelier (1870-1946) and published in his doctoral thesis at 1900. His “theory of speculation” (Theorie de la Speculation, see Bachelier(1900)) was discounted by none other than Henri Poincare, observing that “Mr. Bachelier has evidenced an original and precise mind [but] as the subject is somewhat remote......

Words: 7582 - Pages: 31

Free Essay

Derivatives Markets 3rd Edition by Robert L. Mcdonald

...Corporate Finance* Keown/Martin/Petty Foundations of Finance: The Logic and Practice of Financial Management* Brooks Financial Management: Core Concepts* Copeland/Weston/Shastri Financial Theory and Corporate Policy Dorfman/Cather Introduction to Risk Management and Insurance Eiteman/Stonehill/Moffett Multinational Business Finance Fabozzi Bond Markets: Analysis and Strategies Fabozzi/Modigliani Capital Markets: Institutions and Instruments Fabozzi/Modigliani/Jones Foundations of Financial Markets and Institutions Finkler Financial Management for Public, Health, and Not-for-Profit Organizations Kim/Nofsinger Corporate Governance Madura Personal Finance* Marthinsen Risk Takers: Uses and Abuses of Financial Derivatives McDonald Derivatives Markets McDonald Fundamentals of Derivatives Markets Mishkin/Eakins Financial Markets and Institutions Moffett/Stonehill/Eiteman Fundamentals of Multinational Finance Nofsinger Psychology of Investing Frasca Personal Finance Ormiston/Fraser Understanding Financial Statements Gitman/Joehnk/Smart Fundamentals of Investing* Pennacchi Theory of Asset Pricing Gitman/Zutter Principles of Managerial Finance* Rejda Principles of Risk Management and Insurance Gitman/Zutter Principles of Managerial Finance—Brief Edition* Seiler Performing Financial Studies: A Methodological Cookbook Haugen The Inefficient Stock Market: What Pays Off and Why Haugen The New Finance:......

Words: 423714 - Pages: 1695

Free Essay

Barrick Case Writeup

...Harvard Business School 9-293-128 Rev. October 6, 1995 American Barrick Resources Corporation: Managing Gold Price Risk During 1992 the financial team of Toronto-based American Barrick Resources Corporation, one of the world’s fastest growing and most financially successful gold-mining concerns, met regularly to review strategic and tactical issues related to managing the firm’s exposure to gold price risk. Many major gold mines prided themselves on hedging none of the price risk of their output. If unhedged, a gold mine’s sole output, and hence its profits, cash flows, and stock price, were tied to gyrations in the price of gold. However, American Barrick had in place a gold-hedging program that was an integral and much publicized part of the firm’s corporate strategy. In an environment of falling gold prices, the firm’s hedge position had allowed it to profit handsomely and to sell its commodity output at prices well above market rates. For example, in 1992, American Barrick produced and sold over 1,280,000 ounces of gold at an average price of $422 per ounce, while the market price was about $345 per ounce.1 American Barrick’s gold-hedging program, and indeed all the corporate finance and treasury functions of the $4 billion market capitalization enterprise, were managed by a trio of relatively young but experienced financial executives: Gregory Wilkins (executive vice president and chief financial officer), Robert Wickham (vice president, finance), and Randall......

Words: 13270 - Pages: 54

Premium Essay

Business Finance

...time diversification and logoptimal investment policies, warrant and option-pricing analysis and, ultimately, the Black and Scholes (1973) and Merton (1973) option-pricing models. In contrast to Samuelson’s path to the EMH, Fama’s (1963; 1965a; 1965b, 1970) seminal papers were based on his interest in measuring the statistical properties of stock prices, and in resolving the debate between technical analysis (the use of geometric patterns in price and volume charts to forecast future price movements of a security) and fundamental analysis (the use of accounting and economic data to determine a security’s fair value). Among the first to employ modern digital computers to conduct empirical research in finance, and the first to use the term ‘efficient markets’ (Fama, 1965b), Fama operationalized the EMH hypothesis – summarized compactly in the epigram ‘prices fully reflect all available information’ – by placing structure on various information sets available to market participants. Fama’s fascination with empirical analysis led him and his students down a very different path from Samuelson’s, yielding significant methodological and empirical contributions such as the event study, numerous econometric tests of single- and multi-factor linear asset-pricing models, and a host of empirical regularities and anomalies in stock, bond, currency and commodity markets. The EMH’s concept of informational efficiency has a Zen-like, counter-intuitive flavour to it: the more efficient the......

Words: 11295 - Pages: 46

Premium Essay

Curriculum Source References

...Methods for Investment Analysis, Analysis of Equity Investments: Valuation, and Managing Investment Portfolios: A Dynamic Process. Ackerman, Carl, Richard McEnally, and David Ravenscraft. 1999. “The Performance of Hedge Funds: Risk, Return, and Incentives.” Journal of Finance. Vol. 54, No. 3: 833–874. ACLI Survey. 2003. The American Council of Life Insurers. Agarwal, Vikas and Narayan Naik. 2000. “Performance Evaluation of Hedge Funds with OptionBased and Buy-and-Hold Strategies.” Working Paper, London Business School. Ali, Paul Usman and Martin Gold. 2002. “An Appraisal of Socially Responsible Investments and Implications for Trustees and Other Investment Fiduciaries.” Working Paper, University of Melbourne. Almgren, Robert and Neil Chriss. 2000/2001. “Optimal Execution of Portfolio Transactions.” Journal of Risk. Vol. 3: 5–39. Altman, Edward I. 1968. “Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy.” Journal of Finance. Vol. 23: 589–699. Altman, Edward I. and Vellore M. Kishore. 1996. “Almost Everything You Wanted to Know about Recoveries on Defaulted Bonds.” Financial Analysts Journal. Vol. 52, No. 6: 57−63. Altman, Edward I., R. Haldeman, and P. Narayanan. 1977. “Zeta Analysis: A New Model to Identify Bankruptcy Risk of Corporations.” Journal of Banking and Finance. Vol. 1: 29−54. Ambachtsheer, Keith, Ronald Capelle, and Tom Scheibelhut. 1998. “Improving Pension Fund Performance.” Financial Analysts Journal. Vol. 54, No. 6: 15–21.......

Words: 12603 - Pages: 51

Free Essay


...examining volatility and Value-at-Risk (VaR) measures in financial and commodity markets, none of them focuses on the gold market. We use a large number of statistical models to model and then forecast daily volatility and VaR. Both insample and out-of-sample forecasts are evaluated using appropriate evaluation measures. For in-sample forecasting, the class of TARCH models provide the best results. For out-of-sample forecasting, the results were not that clear-cut and the order and specification of the models were found to be an important factor in determining model’s performance. VaR for traders with long and short positions were evaluated by comparing failure rates and a simple AR as well as a TARCH model perform best for the considered back-testing period. Overall, most models outperform a benchmark random walk model, while none of the considered models performed significantly better than the rest with respect to all adopted criteria. Key Words: Gold Markets, Volatility, Forecasting, Value-at-Risk, Backtesting JEL classification: G17, C22, G32 ____________________________________________ 1. Introduction The recent global financial crisis has highlighted the need for financial institutions to find and implement appropriate models for risk quantification. Hereby, in particular Value-at-Risk (VaR) and volatility estimates were subject to significant changes during 2007-9 financial turmoil in comparison to normal market behaviour. Further, as the risk in equity and bond......

Words: 12182 - Pages: 49

Premium Essay

International Finance

...As a consequence of an increasing reliance on tightly-integrated foreign operations, a parallel world of finance has been opened within every multinational firm and this world has, heretofore, been overlooked. The course materials are designed to address the many aspects of financial decision making within global firms prompted by these changes that are not addressed in traditional materials. The paper provides an overview of the structure of the course and its seven modules with particular emphasis on the three modules that constitute the core of the course. The paper also describes an analytical framework that has been developed through the creation of the course materials to guide critical financial decisions on financing, investment, risk management and incentive management within a multinational firm. This framework emphasizes the need to reconcile conflicting forces in order for multinational firms to gain competitive advantage from their internal capital markets. The paper concludes with a discussion of the course's pedagogical approach and detailed descriptions of all the course materials, including 19 case studies, corresponding teaching notes, several module notes and supplementary materials. Mark Veblen, Kathleen Luchs and Claire Gilbert provided excellent research assistance in the process of writing these cases and the course overview note. Seminar participants at the HBS CORE seminar provided particularly helpful comments and feedback. The Division of......

Words: 25419 - Pages: 102

Premium Essay


... Marks Entrepreneurial Finance Gitman , Zutter Principles of Managerial Finance* McDonald Fundamentals of Derivatives Markets Andersen Global Derivatives: A Strategic Risk Management Perspective Gitman , Zutter Principles of Managerial Finance––Brief Edition* Mishkin , Eakins Financial Markets and Institutions Bekaert , Hodrick International Financial Management Goldsmith Consumer Economics: Issues and Behaviors Berk , DeMarzo Corporate Finance* Haugen The Inefficient Stock Market: What Pays Off and Why Berk , DeMarzo Corporate Finance: The Core* Berk , DeMarzo , Harford Fundamentals of Corporate Finance* Boakes Reading and Understanding the Financial Times Brooks Financial Management: Core Concepts* Copeland , Weston , Shastri Financial Theory and Corporate Policy Dorfman , Cather Introduction to Risk Management and Insurance Eiteman , Stonehill , Moffett Multinational Business Finance Fabozzi Bond Markets: Analysis and Strategies Fabozzi , Modigliani Capital Markets: Institutions and Instruments Haugen The New Finance: Overreaction, Complexity, and Uniqueness Holden Excel Modeling in Corporate Finance Holden Excel Modeling in Investments Hughes , MacDonald International Banking: Text and Cases Hull Fundamentals of Futures and Options Markets Hull Options, Futures, and Other Derivatives Hull Risk Management and Financial Institutions Keown Personal Finance: Turning Money into Wealth* Keown , Martin , Petty Foundations of Finance: The Logic and Practice of......

Words: 465570 - Pages: 1863

Premium Essay

Foreign Exchange Risk

...MANAGING F OREIGN E XCHANGE R ISK WITH DERIVATIVES by Gregory W. Brown* The University of North Carolina at Chapel Hill May, 2000 Version 3.4 Abstract This study investigates the foreign exchange risk management program of HDG Inc. (pseudonym), an industry leading manufacturer of durable equipment with sales in more than 50 countries. The analysis relies primarily on a three month field study in the treasury of HDG. Precise examination of factors affecting why and how the firm manages its foreign exchange exposure are explored through the use of internal firm documents, discussions with managers, and data on 3110 foreign-exchange derivative transactions over a three and a half year period. Results indicate that several commonly cited reasons for corporate hedging are probably not the primary motivation for why HDG undertakes a risk management program. Instead, informational asymmetries, facilitation of internal contracting, and competitive pricing concerns seem to motivate hedging. How HDG hedges depends on accounting treatment, derivative market liquidity, foreign exchange volatility, exposure volatility, technical factors, and recent hedging outcomes. * Department of Finance, Kenan-Flagler Business School, The University of North Carolina at Chapel Hill, CB 3490 – McColl Building, Chapel Hill, NC 27599-3490. Voice: (919) 962-9250, Fax: (919) 962-2068, Email: A more recent version of this document may be available from my web page:......

Words: 22405 - Pages: 90