Diva Shoes

School of Economics and Management

International Financial Management Take-Home Assignment

Course Code: 32304M Dr. Sebastian Ebert TA Diana Morales-Arenas Spring 2014

1. Case study You will have to purchase the case study Diva Shoes Inc. by Susan Chaplinsky from the Harvard Business School website (please see instructions below). 2. Grading 2.A Instructions concerning the case study Obtaining the Case. As mentioned on the syllabus, 20% of your grade will be based on the take–home assignment, i.e. the case study writeup. To obtain the case, go to the Harvard Business School website: https:/ /cb.hbsp.harvard.edu/cbmp/import/ptos/24860258 If it is the first time you log in, you will need to register. 2.B Guidance to solve the case The following set of questions may help you in your solution of the case: (1) What are Diva’s projected profits for the fiscal year ending September 1995?

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IFM 32304M Take-Home Assignment

Spring 2014

(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 Appendix A or the currency option described in 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 exchange rate defined in USD/JPY x 10,000 units (i.e., the same units as the currency option 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 him? Observe that simply answering all the questions will not guarantee a good grade—that depends on the overall quality of your solution. 2.C Additional hints to solve the questions Questions 1 and 2 (a) Obtain the six-month forward rate for...