1. Multinational Finance Management
„The Merrill Case‟
Presentation by: Yu Zhang, Juan Leon
Sanchez, Francisco Magro Ruiz,
Hongfeng Wu and Hasan Soylemez
February 22, 2013

2. 2
Index
Introduction
Problems
Solutions and Options
Comparison
Conclusion and Recommendation

3. 3
Introduction
• Merrill Electronics Cooperation (MEC) was founded in 1950 by
Thomas Merrill
• After his death, Patricia Merrill inherited the 75 % of the share
capital together with her mother
• In 1984, MEC signed an agreement with Goldstone Corporation in
Taiwan, which was a major producer of electronic devices
• In mid-1980‟s, MEC entered the fast-growing market PC market
which was becoming more and more competitive each day
• In 1989, it became a national distributor for Fuji Electronics
• Yen-dominated purchases exceeded $ 20 million during the past 12
months
• Due to growing volume in the market, further Yen purchases was
foresaw

4. 4
Problems
• High volatility of the Japanese Yen
• The payment problem: 90-day currency risk exposure (60
days shipping + 30 days grace period of payment after
delivery)
• Average of 6.1¥/$ difference for a 3-month period with
the average spot rate of 130.83¥/$ (Exhibit 4)
• Most of the equipment were imported from Japan
• Further Yen purchases were foreseen
• Most of the Japanese suppliers insisted on invoicing in
Yen
• More sensitive to currency risk than competitors

5. 5
Options
• No-hedge
• Lock-in exchange rate
• Forward contract hedge
• Money market hedge
• Yen futures hedge
• Options contract

6. 6
Options
Historical Data and Analysis
Scenarios
Pros and Cons

7. 7
Options
122
124
126
128
130
132
134
136
138
140
0 1 2 3 4 5 6 7 8 9 10 11 12
*Exchange Rate Yen/USD
• A trend of Yen appreciation against the USD with an average
annual rate of +10%.
• High probability that the trend will prevail for the future.
What does the historical data show and imply?
*See Exhibit 4

8. 8
Options
SCENARIOS
Scenario 1
Spot Rate ¥/$ remains
same
124.6 ¥/$
Scenario 2
Yen Depreciates by 3%
128.338 ¥/$
Scenario 3
Yen Appreciates by 3%
120.862 ¥/$
Assumptions:
• Historical trend shows that the annual appreciation of ¥/$ was
app. 10%
• Therefore, appreciation/depreciation of ¥/$ would be app. +/-3%
for 3 months
• No-hedge: Continue buying Yen at the spot market each time a
payment has to be made

9. 9
Options - No-hedge
SCENARIOS
Scenario 1
Spot Rate ¥/$ remains
same
124.60 ¥/$
Scenario 2
Yen Depreciates by 3%
128.34 ¥/$
Scenario 3
Yen Appreciates by 3%
120.86 ¥/$
$1,805,778
¥225 million
$1,753,183
¥225 million
$1,861,627
¥225 million

10. 10
Options - No-hedge
Pros Cons
If Yen depreciates, the
company can gain from
lower cost of goods
If Yen appreciates, the
company may suffer from
higher cost of goods
Costs almost nothing (No
premiums, fees etc.)
Exchange rates can not
be precisely predicted
Easy to implement, no
need for specialized
financial staff
Market conditions make
it harder to put sound
exchange rate forecasts
Completely vulnerable to
market volatilities

11. 11
Options - Forward Contract
Forward contracts are agreements between two parties which
require delivery of one currency at a specified future date of a
specified amount of another currency.
• Exchange
rate fixed
between
the parties
1st step
• Time
2nd step
• Buy the
currency at
the price
set in the
1st step
3rd step

12. 12
Options - Forward Contract
BID ASK
Spot rate
(Yen per USD)
124.60 124.70
Forward rate
(Yen per USD)
124.95 125.10
BID: The rate at which bank sells YEN
ASK: The rate at which bank buys YEN
The company needs to buy YEN;
¥225 million on the forward market:
225,000,000 / 124.95 =

13. 13
Options - Forward Contract
SCENARIOS
Scenario 1
Spot Rate ¥/$ remains
same
124.60 ¥/$
Scenario 2
Yen Depreciates by 3%
128.34 ¥/$
Scenario 3
Yen Appreciates by 3%
120.86 ¥/$
$1,805,778
$1,800,720
$1,753,183
$1,800,720
$1,861,627
$1,800,720

14. 14
Options - Forward Contract
Pros Cons
No internal costs
You are responsible to
fulfill the contract and
tied-up
Minimize the risk of the
currency operations
You will be unable to
benefit from any positive
movements in the foreign
exchange rate
Amount and date
adapted to individual
requirements
It can‟t be traded

15. 15
Options - Money Market Hedge
Merrill would buy the YEN at today‟s spot market and place it
in a YEN time deposit or another YEN asset until the due date.
Deposit Credit
90-days Euroyen interest rates 4.3125 % p.a. 4.4375% p.a.
90-days Eurodollar interest rates* 3.3750% p.a. 3.5000% p.a.
Merrill‟s short term borrowing rate is 6.00% + 25 bps
Transactions:
1-) The YEN amount needed to deposit in order to have 225M by
October: 225,000,000 / (1+0.01078125) = ¥ 222,600,093
2-) Borrow from the bank in USD (6.0025% / 4 = 1.500625%)
3-) Convert the USD to YEN as of today:
¥ 222,600,093 / 124.60 = $1,786,518
4-) Time deposit the YEN until the payment date
5-) Pay the bank back in USD, and the supplier in YEN;
USD amount needed along with the interest:
$ 1,786,518 * 1.01500625 = $ 1,813,327

16. 16
Options - Money Market Hedge
SCENARIOS
Scenario 1
Spot Rate ¥/$ remains
same
124.60 ¥/$
Scenario 2
Yen Depreciates by 3%
128.34 ¥/$
Scenario 3
Yen Appreciates by 3%
120.86 ¥/$
$1,805,778
$1,813,327
$1,753,183
$1,813,327
$1,861,627
$1,813,327

17. 17
Options - Money Market Hedge
Pros Cons
Highly profitability if enough
cash available
High complexity of
calculation
No exchange rate risk Volatility of money-markets
Generate profits if loan
interest < deposit interest
Dealing with Japanese
financial market
Possibility of short term
investments
Loan interest pose
additional cost
No penalties for fast
withdrawing
Opportunity costs may
occur if USD appreciates

18. 18
Options - Yen Future Hedge
International Monetary Market (IMM) provided the data:
$ per ¥100 ¥ per $1
September yen futures (IMM) 0.8046 124.285
December yen futures (IMM) 0.8036 124.440
Other Data :
 Standard Future size = ¥ 12,5 million per contract
 Broker‟s fee = $1,500 per contract
 Total ¥225 million

19. 19
Options - Yen Future Hedge
Calculations:
 How much $ should pay for the futures contract?
¥225,000,000 / 124.440 = $1,808,100
 How much futures contracts should be needed?
¥225,000,000 / 12,500,000 = 18 futures contracts
 How much should we pay for the Broker‟s Commission ?
$1,500 * 18 contracts = $27,000
So, the total cost of future contracts including commission is:
$1,808,100 + $27,000 = $1,835,100

20. 20
Options - Yen Future Hedge
SCENARIOS
Scenario 1
Spot Rate ¥/$ remains
same
124.60 ¥/$
Scenario 2
Yen Depreciates by 3%
128.34 ¥/$
Scenario 3
Yen Appreciates by 3%
120.86 ¥/$
$1,805,778
$1,835,100
$1,753,183
$1,835,100
$1,861,627
$1,835,100

21. 21
Options - Yen Future Hedge
Pros Cons
Standardized contracts No tailoring of individual
needs
Possibility of trading Broker commission
Safe method Margin account is
required
Possibility to reduce
exchange rate risks

22. 22
Options - Currency Option Contract
This contract gives the right but not the obligation to buy (call) or to
sell (put) currency or some other asset within a specified period
and at a predetermined price.
Types of currency options:
“European”-type options
“American”-type options

23. 23
Options - Currency Option Contract
October yen call
options (IMM)
$ per 100 ¥ ¥ per $
Strike price 0.800 125
Premium price 0.0170 5882.35
Provided yen
amount
225 million ¥ 225 million ¥
CALCULATIONS:
- Buy call options = ¥225,000,000 x 0.008 = $1,800,000
- Premium cost = ¥225,000,000 x 0.00017 = $ 38,250
- Total cost = $1,800,000 + $ 38,250= $1,838,250

24. 24
Options - Currency Option Contract
SCENARIOS
Scenario 1
Spot Rate ¥/$ remains
same
124.60 ¥/$
Scenario 2
Yen Depreciates by 3%
128.34 ¥/$
Scenario 3
Yen Appreciates by 3%
120.86 ¥/$
$1,805,778
$1,838,250
$1,753,183
$1,838,250
$1,861,627
$1,838,250

25. 25
Options - Currency Option Contract
Pros Cons
Not obligatory All have an expiration
date
High flexibility Pre-paid premiums and
fees
Unexpected market
conditions only leads to a
loss of the premium
Buying out of the
contract leads to a loss
of the premium already
paid

26. 26
Comparison
Options
Scenario 1
Current Spot
Rate Remains the
Same
124.60 ¥/$
Scenario 2
Yen depreciates
by -3%
128.34 ¥/$
Scenario 3
Yen appreciates
by +3%
120.86 ¥/$
Do Nothing - +52,595 USD -55,849 USD
Forward -5,058 USD -47,537 USD +60,907 USD
Money Market
Hedge
-7,548 USD -60,144 USD +48,301 USD
Futures -29,322 USD -81,917 USD +26,527 USD
Currency Options - 32,472 USD -38,250 USD +23,377 USD

27. 27
Conclusion and Recommendation
1. Shall the trend of Yen appreciation against USD continue, the best
hedging option is locking-in a forward rate agreement with the
bank due to the potential gain compared to the other alternatives
and easy format of implementation.
1. On the other hand, shall Yen depreciate against USD, then simply
doing nothing would suffice and be the best hedging option.
2. Options contracts should also be considered since they can be
not exercised if Yen depreciates against USD. In such a case, only
the commission would be lost.
3. All in all, even the best option is highly dependent on the expected
exchange rate and an accurate prediction can never be made.

28. 28
Thank you!