Merton Electronics Corporation Case Solution Essay Example

were all no hedge. From Mar-1997 to May-1997, my forecast was wrong because I thought Japanese Yen would become weaker whereas it became stronger. Therefore, the company lost BIT during these three months. The only period Seep-1997 which I chose hedge would make the forecast change to BIT equal to zero. As a result, the unhinged change to BIT and forecast change to BIT would be 1. 13 million and 0. 93 million respectively. unhinged According to the spreadsheet of Morton Electronics case, the company would have a positive change 1. 3 million to BIT if they chose unhinged strategy during Jan-97 to Par-98. It seems that not hedging would have been the best policy for the company to do Its business. However, it was Just true during Jan-97 to Par-98 because Yen was getting weaker and Dollar was getting stronger. From the historical data, we can easily find that Japanese Yen was becoming stronger from Jan-94 to Par-95. That this period. The banker maintained that since neither he, nor anyone else for that tater, could have accurately predicted how the yen-dollar exchange rate would move in the future.

Though forecasting is not one-hundred percent accurate to know the exchange rate, it is still much more accurate than unhinged strategy which likes gambling. Always Hedge Obviously, forecast change to BIT would become zero if Morton chose hedge strategy. The company would not have both positive and negative change to BIT but just paid some cost for hedging. Hedging acts as an insurance to protect currency exchange rate from fluctuations. It is better than unhinged strategy because it is ally a good solution to lower company's

risk during international business.

In a long-term business, managing risk is more important than dangerous profit in a short time. According to the banker, there were two basic choices when hedging. First is to lock in today an exchange rate that would be close to the current spot rate; the forward contracts they had been using provided this type of hedge. Second is to enter into an option contract that would set an upper bound on the cost of yen, but allow them to take advantage of cheaper yen if that should happen by the time the invoices had to be paid.

To buy either forward contracts or option contracts would make Morton lost some cash, and the company also lose some opportunity profit which they may have positive BIT in currency market. Sometimes Hedging In my opinion, this would be the best solution for Morton Electronics to do a long-run business. From our case, the company had 1. 13 million change to BIT if they chose unhinged; whereas they had 0. 93 million when they chose forecast hedging strategy. Sometimes hedging strategy would have about 83% profit of unhinged, it is also a DOD amount of BIT.

From the spreadsheet, there are four wrong forecast including Mar-97, Par-97, May-97, and Seep-97 among the sixteen months from Jan-97 to Par-98. In other words, our forecasting is about 75% accurate in this case. Conclusion Generally, unhinged strategy would make the company with half-half positive and negative BIT depending on what the yen would do; always hedge strategy prevents the company losing no matter what the yen would do; sometimes hedging based on forecast has the highest

probability for Morton has positive BIT.