Saizeriya and the use of foreign coupon currency swaps. Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Saizeriya and the use of foreign coupon currency swaps Case Study Solution

Introduction:

Saizeriya a Japanese restaurant, it provides healthy Italian foods too, at a very reasonable price. The restaurant opened in 1973, and currently employs more than 3000 employees in Asia. The restaurant enjoys considerable growth in its operations and it is now operating in Japan, China, and Taiwan. Saizreiya orders its materials from mainly from Australia which accounts for almost one-third of its total food demand. The procurement from Australia results in severe foreign exchange rate risk, the management of Saizeriya uses foreign coupon currency swaps to manage this risk which remains quite useful for Saizeriya in the past. However, in 2008 the restaurant incurred a substantial loss from the usage of different coupon currency swaps.These operational losses from the various coupon currency exchange are heavily highlighted in media and results in the negative publicity for the restaurant. The shareholders were very concerned about the losses because the going concern status of the company wasat stake due to these losses.

Problem Statement:

Everything was going right, the company was earning enough profits and the revenue was increasing. The cost of goods sold was also decreasing, the growth prospects were positive, and the shareholders are also happy about the performance of the company. Saiz was using the foreign currency coupon swaps for the hedging of payments to the Australian suppliers of materials.The hedging instrument employed by Saiz was capable of generating high losses and profits if the exchange rate moves unfavorably and favorably. As the Japanese Yen appreciates, it impacted the results of Saiz, the profits of 4.2 billion Japanese Yen converts into the losses of billions due to the losses made by the derivative instrument.

Primary position of Saizeriya before the hedging:

The main area of Saiz before the losses from hedging is magnificent; the restaurant is performing well and was earning good profits. The competition in the industry is high, on the other hand, the economy of Japan was shrinking, and customers are spending lower on unnecessary food items, the oil process is increasing which doesn’t only force the customers to pay less but also increases the costs of the products offered by Saiz.

Furthermore, the management is focusing and is very enthusiastic about the future growth of the restaurants, in recent past the company expands the chain of restaurants in the international market. The management is also considering opening the restaurants in the more countries like USA and UK. However, the expansion plans of the restaurants may be threatened due to the losses that it had incurred because of the derivative instrument it uses for hedging the payments to Australian supplier.

Primary position of Saiz after the hedging:

The central area of Saiz after the hedge,is very much negative; it is incurring heavy losses which not only affects its current earnings but also affecting the future earnings of the restaurant. The future growth prospects are also in danger because of due to the loss it incur by hedging instrument. The investors might be reluctant to inject further finance in the company because the ability to generate profits strictly threatens because of the losses. On the other hand, the debt holders might enforce the management to repay their sum because the capacity to pay the amount at a later date might not be possible, thus, impairing the going concern assumption of the company.

The company might get legal notices from the finance providers especially from shareholders because the management was involved in taking furious risks and careless in managing the investment of the shareholders. The management might be subject to anal legation of not carefully stewarding the assets of the shareholders, and they might call for the liquidation of the restaurants. Furthermore, the management faces serious investigation from the regulatory authorities for taking excessive risks and taking actions which resulted in their current situation. Other options are also available to the management such as forwards, futures and options which are considered to be less risky but the management chooses the most hazardous hedging instrument. The case study scenario explicitly mentioned that the other options are more favorable for the organization as the risks involved in those options are few.

The position of the Bank:

The reputation and position of the bank are also affected by the loss Saiz had incurred, although the bank is getting tremendous profits from the deal, the reputation of the bank might be impaired because it has been in the media headlines for a long time. Furthermore, the Saiz is also planning to sue the bank for the losses it generates due to the loss on derivative instrument. Facing legal proceedings might have many negative consequences on the future of the bank; many of its current customers might not enter into the business with the bank because of the impaired reputation and integrity of the bank. Furthermore, if the bank is found guilty then it might have to pay damages to Saiz, the penalties are also expected to be imposed by the regulatory authority if it found on the wrong side of the law.On the other hand, the financial position of the bank will be improved and confident because of the gain it got from the deal with Saiz. Furthermore, the bank might be correct because it is also owed a fiduciary duty to its shareholders to increase and maximize their wealth.

Saizeriya and the use of foreign coupon currency swaps. Harvard Case Solution & Analysis

Foreign Currency Coupon Swaps: Was this for Hedging or Speculation?

Deciding whether the derivative was for hedging or speculation might be tough in this case because the characteristics of the financial instrument are of speculative nature, but management is of the view that the derivative was for hedging purpose. The character of this debate is very subjective in nature because the perspective of the management and public might not be aligned. It can be assessed that particular more derivative instruments are also available such as forward rate agreements, futures and the currency options to the company which are considered to be less risky for the Saiz. The management chooses to hedge the Australian payment by using the foreign exchange which was very dangerous and eventually proves disastrous for the Saiz. On the other hand,foreign coupon currency swap was also giving the highest returns as compared to all other hedging strategies that were available to the company at that time.........................

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