Great Eastern Toys (D)

Published 12 Jan 2000
Reference 4876
Region Asia
Summary

Great Eastern Toys (D) The company faced currency risk on its sales to European markets, and on some Yen loans it had taken. Because the HK$ was pegged to the US$, currency risk on its American sales was seen as practically nil. In this respect, the company’s currency position is similar to that of a French or Spanish company exporting to other countries in the European Union whose currency is pegged to the Euro, but also exporting to North America, while financing part of its operations with Yen or Sterling

Teaching objectives

The case raises many of the typical issues facing exporters, importers, and others active in international trade. These include: 1. Should companies hedge currency or other financial risks? Should companies speculate - that is, try to make money from taking currency positions? 2. How does one measure what is at risk? 3. If there really is a risk of loss from fluctuating currencies, what can be done about it? 4. What instruments are appropriate to manage this risk? 5. How do the foreign exchange markets function, and what is their relation to the financial markets? 6. Can currency movements be forecast? If so, how does one go about it? There is adequate information in the case study to explore all of these questions. However, the instructor will need to explain a number of technical issues such as how forwards and options are used in hedging, how they are priced, and what risks do they create. Two full class sessions can be devoted to discussion.

Keywords
  • Financial analysis
  • Working capital management
  • Investment appraisal
  • Valuation of a company
  • Currency risk management