Great Eastern Toys Essay

Great Eastern Toys Essay.

Introduction

Great Eastern Toys is a company in Hong Kong that exports a huge percent of its total sales to the North American and European markets and hence is exposed to currency risk. Previously, the company was occupied with expanding their business and the company’s management had never given much attention to currency risk until their recent meeting with their banker. The banker pointed out that the depreciation of the European currencies during the previous two years had resulted in a substantial loss of income.

The company’s management was indeed convinced that they should begin to devote more time and manage their currency position. In this report, we are going to explore the different options for Great Eastern Toys to hedge its currency exposure and recommend the best hedging strategy for them.

Currencies to Hedge

Great Eastern Toys with annual sales of over HK$245 millions (US$31 million) exported about half of its products to North American markets, close to 50% to Europe, and less than 5% in the local market.

This resulted in incoming cash flows denominated in Deutsche Mark and U.S. dollar. The firm finances its operations mainly with the local currency, Hong Kong dollars, but also with Yen loans. As for loans, the firm had borrowed about HK$ 24.45 million and ¥ 120 million (HK$ 6.64 million).

U.S. dollar

As half of the sales revenue is denominated in U.S. dollars, it is necessary to examine whether or not to hedge the currency exposure from the U.S. dollar. For more than ten years, the Hong Kong dollar has been firmly pegged to the U.S. dollar. Thus the currency risk on Great Eastern Toys’ American sales was seen as practically insignificant. Even if the peg were to be removed, the Hong Kong dollar is expected to depreciate against the U.S. dollar, since the Hong Kong dollar appears to be substantially overvalued, as the annual inflation in Hong Kong is running at double the rate than in the U.S. Accordingly, we believe that Great Eastern Toys can leave open the exposure from the export sales in U.S. dollars.

Deutsche Marks

A large portion of the sales revenue is received in Deutsche Marks, DEM, by Great Eastern Toys. During the recent meeting with the banker, the banker directly pointed out that the depreciation of the European currencies in the last two years had resulted in a huge loss. At this point, it seems quite vital to consider hedging strategies against the depreciation of DEM. Most European currencies had been depreciating against the dollar during the past three years, with no exception for DEM.

It might be believed that this is about time the trend will be reversed. If the Euro becomes a reserve currency after the Europeans adopt the Euro as their common currency, a strong worldwide demand will form and indeed its value will appreciate. However, at the moment, there seems to be many other factors that will limit the potential rise in the value of the European currencies. Accordingly, we have decided that Great Eastern Toys should hedge against the depreciation of the DEM.

Japanese Yen

Lastly, since the firm currently has an outstanding debt of ¥ 120 million, equivalent to HK$ 6.64 million, Yen needs to be considered as well whether or not to hedge against its currency exposure. For the past three years, the Yen has been steadily declining against the HK$ from 11¥/HK$ to currently about 18¥/HK$. To determine whether the Yen is expected to depreciate or appreciate, we have used the following expression of the international fisher parity:

[E(S¥/HK$) – S¥/HK$]/S¥/HK$ = (rN¥ – rNHK$)/(1+rNHK$)

By plugging in the relevant values into the above formula, we can compute the expected exchange rate between Yen and HK$:

[E(S¥/HK$) – 18.0]/18.0 = (5.5% – 0.4%)/(1+0.4%)
E(S¥/HK$) = 18.9 ¥/HK$

According to international fisher parity, therefore, the Yen is expected to depreciate. Based on the fact that the Yen is expected to depreciate in value as well as the fact that the loans in Yen account for a very small part of the total sales, we suggest that Great Eastern Toys will stay with its “do-nothing” approach for their Yen loans. The depreciating Yen means that the company will be required to have fewer Hong Kong dollars to pay back its loans.

Evaluation of Hedging Strategies

There are four main methods for hedging the currency exposure of DEM; Forward, Money Market, Futures and Currency Options. Each alternative has different timing of cash flows and costs.

Forward Contract

The value of this contract is computed using the three-month HK$/DEM forward rate. There will be a cash inflow of DEM 4 million on October 15th. This amount will be hedged using the forward rate of HK$ 4.3535/DEM. By multiplying the cash inflow denominated in DEM by the forward rate, the total amount of cash inflow in HK$ is obtained, HK$ 17,414,000. Simply looking at the forward rate, we know that the DEM is expected to appreciate which Great Eastern Toys could take advantage to.

A forward contract offers a complete hedge against the currency risk; the amount and maturity date can be negotiated to fit in with Great Eastern Toys objectives. There is no additional cost for hedging, like the other strategies do. There is no extra direct transaction costs involved with this strategy: the price and time is set at time 0 and money is delivered at the time agreed. Collateral, however, is required. Since Great Eastern Toys already has short term working capital problems, tying up capital for a forward contract may not be the best hedging strategy.

Money Market

The major cost of money market hedge is the interest on newly incurred debt at t=0. The interest rate is 7.875% APR, for the amount of money that is discounted back from DEM 4 million received on October 15th. As APR is annualized interest rate, we divided this cost of debt in to quarter (90 days basis) which is 1.97%. There will be an initial cash flow in of DEM 3,922,770 on July 15th. After converting this amount at the spot exchange rate of HK$ 4.3085/DEM, it will be reinvested at a 400bp above HIBOR rate (13.25%). Profit will be in total of HK$ 558,854 from this reinvestment. Total cost of debt from APR is DEM 77,230 and subtracting this from reinvestment fund will be HK$ 17,461,111.

Currency Option Contract

Choosing to hedge the currency exposure of DEM through currency option trading provides an option to choose to exercise at a strike price of HK$ 4.3103/DEM within 90 days. Therefore, in the event that the DEM depreciates, we would have the option to exercise our option and benefit from the depreciation. However, there is HK$ 0.063/DEM premium.

The maximum amount we would get, excluding the total premium of DEM 58,464 will result in the total cash flow of HK$ 16,989,200. Additionally, in order to conduct an option a marginal account setup fee and commissions need to be paid to the broker as well. Buying a put option would limit potential losses without limiting potential gains. However, options only offer a partial hedge, like insurance. The three month DEM OTC put option only gives a net value of if the exchange rate goes all the way down to zero which is a bit unrealistic.

Futures for USD hedging

Aside from three-month hedging strategies for DEM, there is a hedging tool that could have been useful for hedging against the currency exposure from the U.S. dollar. One of the limitation is that is only possible in units of DEM 125,000. As well, futures contract requires collateral from Great Eastern Toys to initiate the trade.

Thus there is an additional cost of an account fee of US$ 1,500. A futures contract is marked to market on a daily basis and any losses must be made up in cash on a daily basis while the offsetting gain will be deferred until the transaction actually occurs. Even though the position can be reversed any time, a lot of liquidity is required and because Great Eastern Toys is currently experiencing working capital problems and needs to further reduce outstanding loans due to the credit squeeze; this option would also not be viable.

Our Suggestion

In evaluation, hedging sales during times of peak which occur in the months August to November would be very beneficial to Great Eastern when more than half of annual sales are made. Hedging strategies should be set up in a way such that the maturity of our hedging strategy matches the time of revenue recognition, i.e. when the product is delivered.

Forecasting exchange rates is very difficult, but in order for Great Eastern to not make future losses, we would propose Great Eastern to hedge against the DM as it appears to be the most prominent currency risk Great Eastern is facing due to half of its annual sales being made to the European Markets and sales were hurt in the past. After analyzing each of the possible currency risk hedging strategies for Great Eastern Toys, in the short-term, money market hedging should be used against the DM to yield the best results.

Great Eastern Toys Essay

One World Currency Essay

One World Currency Essay.

With the development of international communication, the world becomes smaller. Many areas such as foods and culture from different part of the world become integrate. Some parts of the world connect closer than ever before range from law to currency, like the European Unions. Some people come up with such an idea that is what if we use the same currency all over the world? There is no doubt that using one-world currency will bring lots of benefits to international trade.

Twelve countries of the European Union have already used the same currency.

One obvious advantage to customers in those countries is that they can purchase more goods than before with lower price. All of the business in those counties can trade freely. Merchandisers can get more chances than ever before and governments can also get more foreign investment. Using one-world currency also benefits travelers. As people are living a better life than before, travelling is a good choice for us to spend our leisure time.

If we use the same currency all over the world, we can travel without considering exchange rates. There is no need to change money anymore.

Travel seems to be more enjoyable and attractive. When we use the same money at abroad as that at home, we will feel like we are natives. We all think we are a member of the whole world. It is good for the world peace. However, there are also some drawbacks if we use one currency. First of all, it is very unstable to use one-world currency. Once a country breaks out a financial crisis, finance of other countries will also be influenced. Like Eurozone, when the debt crisis occurred in Greece, other countries in Eurozone also suffered a lot.

This showed that it is very hard to maintain the stability of financial world. We should also see many obstacles lie on the way of currency integration. For example, cultures are different and economic performances vary a lot. Admittedly, there are some advantages if we use one currency. However, when comparing to its disadvantage and obstacles at this stage, it is not worth to say. I think we can achieve the dream of using one currency only if all countries in the world have similar economic performance.

One World Currency Essay

Innocents Abroad Report Essay

Innocents Abroad Report Essay.

Case Background

This case deals with a matter that all international investors deal with. When a client decides to invest internationally, they run the risk of not only the investment losing value, but also the currency losing value. In the case of Sandra Meyer, it was not about just convincing a client about investing internationally; she had to convince her largest client’s Chief Investment Officer, Henry Bosse. The three (3) main topics Sandra was focusing on were international diversification benefits, currency fluctuations and the possible benefits, and pros and cons regarding the global equity markets and the various correlations.

She knew that if she could fully explain those topics, she would be able to convince Bosse to follow through with the international investments. Sandra’s company, CapGlobal, is comprised of herself and six (6) other international investors. CapGlobal served a small number of large institutions by managing their portfolios regarding international allocations. Their methodology was focused on the quantitative models and research in international markets.

Normally, CapGlobal gathers data from markets around the world at an individual country level, but for the case of Bosse, they Sandra decided to gather information on both regional and individual country levels.

Key Findings:

She therefore decided to analyze the performance of international and U.S. equities from 1991 to 2013 and also for shorter periods within that period (1991-2001 and 2002-2013). Included in the analysis are Australia, Canada, China, Germany, India, Japan, and the United Kingdom as well as the U.S. First monthly return were calculated for each market, and then the average monthly return was calculated. To simplify the understanding of the analysis, Sandra converted all foreign currency to USD using specific prices for that time period. Sandra then compiled a list of all monthly currency exchanges of the foreign currency to USD. Sandra wanted to show, year by year, what portion of international market returns was accounted for by equity performance and what portion resulted from currency movements.

The main factor many of CapGlobal clients are concerned about is performance of international stocks relative to U.S. stocks. With that in mind, Sandra analyze the historical data on the performance of a domestic index, the S&P 500, and two international indices, Morgan Stanley Capital Inc.’s Europe, Australasia, and Far East (EAFE) index; and Morgan Stanley Capital Inc.’s Emerging Market (EM) Index. Wanting to take her analysis further, Sandra demonstrated how local equity returns and currency movements each contributed to the returns to U.S. investors. To do so, Sandra calculated the return on foreign equities relative to the S&P 500, using the native currency-based EAFE and EM indices and the S&P 500. The final step in the analysis was to compile all the data into a risk-return framework. This was done to show how international diversification enhanced the returns that were possible for a domestic investor.

In other words, to show what the benefits were and how it could cause the results to fluctuate. Sandra used the monthly index values for the S&P 500 and the EAFE indices to calculate the monthly returns of both. The client presentation that Sandra would give to Bosse and possibly other future clients would consist: The annualized returns for the equity markets of Australia, Canada, China, Germany, India, Japan, the United Kingdom, and the U.S. from 1991-2013 (1991-2001 and 2002-2013), using both country currency returns and USD converted returns.

The correlations for different markets over the entire period plus sub-periods using first the returns data with local currencies and then USD converted data. The annual performance of foreign equities by the EAFE and EM indices comparative to U.S. equities by the S&P 500 index from 1991-2013 and the breakdown of said performance into local equity returns and currency returns. The returns of a series of portfolios based on different mixes of foreign and U.S. equities, using the returns on the S&P 500 and EAFE indices (both original country currency and USD converted) to construct these portfolios.

Recommendations

My recommendations for Sandra begin with how she will present this information. She needs to understand that, currently, her client is hesitant in investing internationally, and she needs to reinforce the idea that she is using their money and will be supportive with any decision they select. This allows the client to have a sense of comfort and importance when they are listening to the presentation. If the client is not comfortable, they will not likely follow through with the presentation no matter how accurate and promising the information portrayed is. After Sandra effectively conveys her understanding about using the client’s money to invest internationally, I feel she should immediately continue the presentation by explaining her data set time period and the various markets and countries used to collect said data. I would suggest that she use the planned set from 1991 to 2013 with the subdivision as planned.

Now some might think that including so many years before the market crash of 2009 is unnecessary, but, to the contrary, it shows how the US market and the USD always bounce back after an economic crisis. Sandra’s extensive research in the listed foreign markets (Australia, Canada, China, Germany, India, Japan, and the U.K.) provides ample countries for the client to see how the U.S. compares. In addition, by selecting the three of the largest markets available (S&P 500, EAFE and EM) Sandra is providing more than enough information for the client to understand how global markets correlate between each other. Subsequent to explain the data set, I feel Sandra should explain the differences between the foreign currencies, and how the presentation will convert most of the data to USD for the sake of the client better understanding the presentation.

This is important because the client will not be investing in the foreign currency, they will be investing in USD. Once the client understanding that, Sandra should go into detail how the USD compares to foreign countries over the time period she selected in an annual basis. This will show trends in how the USD has changed over the years. It should also be noted that the information Sandra compiled regarding Monthly difference is a valuable asset and should be provided to the client as additional information, but for sake of the presentation, I feel Sandra should only use the annualized data sets, considering too many figures could confuse and deter the client. The next main point that Sandra needs to make is the annual indexes of international markets. This is what will show the client that the foreign countries are worth investing. Again, by focusing on annualized data, Sandra can clearly show the countries that are providing best gains for the sake of investing (Exhibit 2).

At this point Sandra could explain how even though the U.S. might have a stronger currency and market, there are still aspects where foreign countries might be better. An example of this could be how even though China has a weaker currency and market, the fact that they provide 19.7% of the U.S. imports means they are of value, and could show potential market growth in the future. (International Trade Center. 2014) This is just to explain why specific countries are included in the data set when they are obviously not as strong as the U.S. and how even though they might have aspects that are valuable to the U.S. there are still risks that come with investing in those smaller countries. Once the client understands all the information portrayed by the analysis, I feel Sandra should begin providing the client examples of how they could have profited if they invested internationally in previous years.

An example could be showed of how much the Australian market and currency has been increasing. If someone was to invest in iron ores & concentrates from Australia in 2009 at the start of the economic climb back, that person would be experiencing approximately 42.96% return on investments thanks to their significant market increases. That figure does not reflect the increase in currency revenue as well. In those five years, the AUD, when compared to the USD, decreased approximately 19.08%. This means that coupled with the 42.96% from the market and 19.08% form the currency, the investor would have gained a total of 62.04% on their initial investment.

References
International Trade Center. 2014. Top US Imports (Top US Imports). http://www.worldsrichestcountries.com/top_us_imports.html. Retrieved 25 January 2015. Mihir A. Desai, Kathleen Luchs, Elizabeth A. Meyer, and Mark F. Veblen. March 02, 2004, Innocents Abroad: Currencies and International Stock Returns. Harvard Business Review. https://hbr.org/product/innocents-abroad-currencies-and-international-stock-returns/204141-PDF-ENG. Retrieved 25 January 2015. Exhibits

Innocents Abroad Report Essay

Penny Argumentative Performance Task Essay

Penny Argumentative Performance Task Essay.

Do you think the penny should be preserved? The one-cent piece, commonly referred to as the penny has been in a giant argument in the United States about whether if we should keep the penny in circulation, or abolish the penny totally from the U.S currency. The penny should be abolished totally from the U.S Currency for several different reasons.

To begin with, have you ever thought about the cost of a penny? If you ask a random person, they would probably say one cent.

But on the other hand, according to the article, “The Cost of a Penny” by J. Wendell Shelton it states that the when the U.S Mint mints, or creates, a new penny, it costs 2.4 cents to mint, 1.4 more cents that the penny’s actual worth.

Have you ever seen a penny on the side of a road and took your time to pick it up? Many people see pennies every day but don’t pick it up.

This is because the penny’s value has gone done a lot over the years. Since technology have developed so much and more digital transactions than physical making the penny almost non-existent.

According to, “Penny Anti,” the U.S Treasury loses $100,000,000 dollars annually just from making pennies. Now think about it, your annual paycheck might be $100,000 dollars but the cost from pennies would be 1000X your annual paycheck. This is one of the reasons why we should get rid of the penny, yet the government still wants to lose money from making pennies.

The U.S government makes 4,300,000,000 pennies annually more than twice the annual output of all other coins combined! That means that the penny is worthless and the government spends the most money making worthless coins. This is one of the reasons that I believe we should remove the one-cent piece from the U.S currency.

Many people will argue that the prices would round up if we get rid of the penny, yet that would not be the case. According to The Cost of a Penny, if we round prices down and not up, businesses would attract more customers and to avoid the higher prices and people not buying anything from stores that would round up.

Many people will argue that the penny is a piece of American history and culture yet there are more reasons to eradicate the penny than to sustain it. Though I can see why some people would want to keep the penny in circulation based on its history, though the reasons to abolish it is more important.

Penny Argumentative Performance Task Essay