Merton Electronics Case Study 1) Merton Electronics is subject to transaction exposure. Transaction exposure is the gains or losses realized from the settlement of specific transactions that are denominated in a foreign currency. There are two main types of transaction exposure: 1) Purchasing or selling on credit goods denominated in a foreign currency 2) Borrowing or lending funds when repayments is going to be made in foreign currency. In respects to Merton’s Yen payments they are subject to transaction exposure. Merton imports a majority of its products from Japan. This results in payments due to suppliers that are denominated in Yen. Merton has locked in outstanding transactions with Fuji and Goldstone that would be
The futures hedge is fairly similar except you also have to pay a fee to buy the futures contracts. 6) The most expensive hedging strategy is buying the call option. This is due to the premium that you must pay in order to purchase the security. It is the most expensive because you have the option to not exercise the security depending on current exchange rates. Also it is the most expensive but also provides the most coverage because you would be gaining on the losses you would be suffering on the operating side. If it expires you still are forced to pay a premium to the writer of the call. 7) Merton should definitely hedge every purchase from Japan. Currency risk is a very dangerous risk for companies and should be hedged. The “do nothing approach” is ok in some instances like the one we will discuss in question 8, but in this case it must be hedged. If not a large change in the Yen would hurt our market value exponentially. A bad quarter due to rising costs could become even worse if you are forced to write off a huge currency loss at the end of the quarter or fiscal year. 8) As mentioned in the previous questions sometimes the “do nothing approach” is actually a good approach to take for businesses. In the case of purchases from Taiwan Merton should do nothing to hedge this. This goes back to the fact that Taiwanese corporate officials do everything they can do tie the value of their currency to the value of the