Diva Shoes, Inc

Abstract

This case examines the exchange rate risk of a U.S.-based manufacturer of women's luxury shoes that has recently introduced its product in Japan. Students are asked to evaluate the extent of the firm's exposure to currency risk and whether hedging via forward contract or currency option is advisable.

Excerpt

UVA-F-1222

Rev. Jul. 23, 2012

DIVA SHOES, INC.

In April 1995, Lisa Stone ended a conversation with Benjamin Bisno, the president and CEO of Diva Shoes, Inc., concerning his firm's growing exchange rate exposure. Since joining the foreign exchange desk at Merrill Lynch three years earlier, Stone had worked with Bisno in executing relatively simple “forex” transactions for the company. She provided information and advice on the firm's decision to increase purchases of materials from Italian suppliers and to expand into the Canadian and Japanese markets. Diva Shoes, a U.S.-based company, had first introduced its products in Japan in June 1993, and sales had reached an unexpectedly high level of (Japanese yen) JPY2.47 billion (equivalent to [U.S. dollars] USD25 million) the following year. Although Bisno was pleased with his initial success, he questioned how long this demand—and the strong yen that had accompanied it—would last.

Background

Benjamin Bisno, a native Italian, left his home country during World War II to move to Brazil and then to the United States. For most of his adult life, he managed small companies in the fashion and design industry that specialized in luxury goods. While in Brazil, he became familiar with shoe manufacturing and assembly and developed an interest in the design of luxury goods. After the Bisno family moved to the United States, he started Diva Shoes, a company that designed and manufactured high-quality women's shoes and sandals. Although Diva Shoes began as a small operation in New York City, it quickly developed a national reputation and its own market niche. The company's products, designed by Bisno's daughter, gained notoriety as imaginative, elegant footwear. The shoes commanded an unusually high price of USD400 to USD600 per pair and were sold only in the most exclusive boutiques. The company had recently seen an increase in orders after actress Daryl Hannah had worn a pair of Diva shoes to the Academy Awards.

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Keywords: Exchange rate risk, forward contracts