Question

Mauna Loa Macademia. Mauna Loa Macadamia, a macadamia nut subsidiary of Hershey's with plantations on the slopes of its namesake volcano in Hilo, Hawaii, exports macadamia nuts worldwide. The Japanese market is its biggest export market, with average annual sales invoiced in yen to Japanese customers of 1,200,000,000 yen. At the present exchange rate of 125/, this is the equivalent to $9,600,000. Sales are relatively equally distributed throughout the year. They show up as a 250,000,000 yen account receivable on Mauna Loa's balance sheet. Credit terms to each customer allow for 60 days before payment is due. Monthly cash collections are typically 100,000,000 yen. Mauna Loa would like to hedge its yen receipts but it has too many customers and transactions to make it practical to sell each receivable forward, it does not want to use options because they are considered to be too expensive for this particular purpose. Therefore they have decided to use a "matching" hedge by borrowing yen.

A: How much should Muana Loa borrow in yen?

B: What should be the terms of payment on the yen loan?

Answer 1

Solution:

In case of covering the yen exposure, the company has to get a loan which can be renewed annually with the change in the interest rate. This will enable the company to cover the exposure in foreign exchange which also covers the unexpected sales,

The following given information will be used to determine the borrowing in Yen by ML:

Average annual invoiced sales = ¥1, 200,000,000

Current exchange rate ¥125/S

Accounts receivables ¥250,000,000

Payment days = 60

Monthly collection ¥100,000.000

a.)

Determine the amount to be borrowed in yen:

As per the given information, the monthly receipt of amount is V100,000,000. This is the actual source for the repayment of any hedge. If in case the company wants to cover for one year then it has to borrow loan for one year cash flow in addition to the interest and it has to be converted in to the US$ at one shot.

Let us assume the annual interest rate is 5%.

S.no	Description	Values
1	Monthly cash flow	¥100,000,000
2	Number of months in a year	12
3	Total annual cash flow (12x¥100,000,000)	¥1200,000,000
4	Interest on annual cash flow at 5% (¥1,200,000,000 5%)	¥60,000,000
5	Total amount including interest (¥1200,000,000 + ¥60,000, 000)	¥1,260,000,000
6	Current exchange rate	¥125/S
7	Amount in USS ¥1,260,000,000/¥125/S	$10,080,000

Therefore, the amount to be borrowed in yen is ¥1, 200,000,000 annually, and additionally amount of interest is ¥60,000,000. Total is ¥I, 260,000,000.

b.)

The terms of the borrowed sum ought to be to such an extent that it ought to reimburse the borrowed sum month to month out of the monthly cash inflows, but the instalment being made just on the principal. The measure of interest payment which must be made one year from now has as of now, which is secured by the getting of both the principal and interest.

However, one thing to be noted that the company should not borrow the amount of account receivables (¥250,000,000) in order to cover its balance sheet exposure. This is because it will only enable the company to cover the accounting exposure and not the operating exposure which is the cash flow exposure.