Popular Japanese fast-food chain Saizeriya operates affordable family-style Italian restaurants in Japan with subsidiaries in a number of Asian locations. Since the company’s Australian suppliers require payments to be made in Australian dollars (AUD) instead of Japanese yen (JPY), volatile currency exchange rates continue to be a serious risk to Saizeriya’s operations. The company’s president, Issei Horino, believes foreign currency hedging could reduce the costs associated with exchange rates. But an earlier attempt to use foreign currency coupon swap contracts from BNP Paribas went horribly wrong— it cost the company JPY15bn to break those contracts. As the JPY continued to depreciate, together with declining restaurant sales and a falling share price, Horino decided to revisit the company’s previous use of foreign currency hedging to investigate whether Saizeriya could adopt an appropriate foreign currency hedge.
At the end of the class, students will be able to do the following:
- Understand the critical thinking skills that top management must possess to make decisive business decisions, i.e., hedging.
- Appreciate how courts in various jurisdictions, e.g., Japan and the UK, apply national laws on which judgments about hedging cases are based.
- Recognize the importance of good economic analysis when assessing risks associated with financial derivative products.
- Students will be able to construct their own economic analysis for a derivative case with actual data provided in this case.
- Students will comprehend that the fundamental elements of good corporate governance involve transparency and disclosure. These qualities form a solid basis for the development of a system for hedging that protects shareholders and stakeholders by ensuring accurate information is available on which they can make informed decisions.