Questions
1. Briefly describe the situation that is facing Diva in this case.
2. Benjamin Bisno has made no real attempt to manage Diva’s exchange rate risk up to now. Why not? Has this strategy worked well for him? Do you think it is a good strategy going forward?
3. Why is Diva’s exposure to the yen greater than its exposure to the Italian lira?
4. Over the past 16 months, how has the yen been doing vs. the dollar? Has this been good or bad for Diva? Why?
5. Describe the differences between a forward currency hedge and a currency option hedge. If Diva were to choose to hedge its exchange rate risk with the yen, which would you recommend and why?
6. This case takes place in April 1995. Investigate what happened to the Yen/Dollar exchange rate over the next three years. What do you find?
7. Look at Diva’s estimated yen revenues for 9/28/95 in Exhibit 4. What is the expected revenue growth for the six months from 4/1/95?
8. Assume that Diva’s yen revenues continued to grow at that rate over the next three years. Show what they would be each six months in yen, and in dollars (based on what we now know were the exchange rates).
