Question

Mauna Loa Macadamia a macadamia mut subsidiary of Hershey's with plantations on the slopes of its namesake volcano in Hilo, Hawa exports macadamia nuts worldwide. The Japanese market is its biggest export market, with average annual sales invoiced in yen to Japanese customers of V1.320,000.000. At the present exchange rate of 123/5, this is equivalent to $10,731,707. Sales are relatively equally debibuted throughout the year. They show up as a 127,500,000 account receivable on Mauna Loa's balance sheet. Credit terms to each customer allow for 60 days before payment is due. Monthly cash collections are typically $110,000,000 Mauna Los would like to hedge its yen recepts, but it has too many customers and transactions to make it practical to sell wach receivable forward. It does not want to use options because they are considered to be too expensive for this particular purpose. Therefore, they have decided to use a "matching" hedge by borrowing yen. Assume the annual interest rate on the loan is 3.50%

How much should Mauna Loa bow in US dollars? b. What should be the terms of payment on the yan loan?
a. How much should Mauna Loa bow in US dollars?
(Round to the nearest dollar)
b. What should be the terms of payment on the yen loan? (lect the best choice below)
A. Maria Lo should borrow 27.500.000 accounts receivable to cover it accounting exposure not only borrow the cash flows to cover its operating
B. The loan should be paid out of the monthly cash flow with payments on principal only. The interest payment one year hence has already been covered by
borowing both principal and interest upon
C. The loan should be repaid out of the monthly cash flow, with payments on both principal and interest
D. Mauna Loa should borrow both 127,500,000 accounts receivable and cash flows to cover its accounting exposure and operating exposure at the same

Answer 1

Mauna Loa needs to determine the appropriate U.S. dollar amount to borrow to hedge their Yen receipts from export sales to Japan. The monthly cash collections of $110,000,000 suggest that the borrowing should match this cash flow, with the loan repayment terms to include both principal and interest.

Step-by-step explanation:

The scenario involves Mauna Loa Macadamia, a subsidiary of Hershey's, which is looking to hedge its Yen receipts due to exports to Japan. The company has decided to use a 'matching' hedge by borrowing Yen, given that the forward contracts and options are not practical or are too expensive. They have an average annual sales figure invoiced at V1,320,000,000 and sales are distributed relatively evenly throughout the year. The discussion revolves around the appropriate hedging strategy for the company's foreign exchange risk.

If we take the current exchange rate of 123/5 Yen to the U.S. dollar, Mauna Loa's annual sales in U.S. dollars are $10,731,707 after conversion. To determine the amount to borrow, the company would ideally match the borrowing amount with its monthly cash flow, since sales are evenly distributed. This monthly cash flow is $110,000,000. To calculate the loan amount in U.S. dollars, the company would convert the monthly Yen receipts to dollars at the present exchange rate of 123/5. For the terms of the Yen loan, the company should aim for a structure that allows for repayment of both principal and interest out of the monthly cash flow, which would correspond to option (C).

However, the question does not provide the exact amount of monthly yen receipts, so we cannot calculate the equivalent U.S. dollar amount to borrow without making assumptions. Therefore, the provided figures and question details would need to be clarified to give an accurate answer. As for the terms of the loan payment, since Mauna Loa wants to avoid options due to cost, the best choice would likely be option C, where the loan is repaid out of the monthly cash flow, with payments on both principal and interest.