Questions for Diva Shoes Note: you have to address these questions but you can address other issues as well within the format constraints.
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?
3. “Forward traders quoted forward and futures prices based on the difference between foreign and U. S. interest rates. ” Explain what this means in your own words and why ?
4. “In addition, some of Diva’s foreign exchange risk was reduced by offsetting inflows and outflows in particular markets. ” Explain what an operational hedge is with examples of your own.
5. What did Bisno perceived as the cost of doing business overseas ? does his perception make economic sense ? Why or why not ?
6. Explain exactly how to estimate the annualized standard deviation of lognormal returns of exchange rates relative to U. S. dollars. How would you do the calculation if the data were weekly instead of monthly ? daily ? explain in detail.
7. How much exposure to exchange-rate risk does Diva Shoes have in April 1995? explain in detail and with numbers.
8. 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 x 10,000 units (i. e. , the same units as the currency option is quoted).
9. What do you see as the trade-offs between the alternatives for hedging ? 10. 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?
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