OSG Hedging Exposure
107-051-1
MITSURU MISAWA
OSG CORPORATION:
HEDGING TRANSACTION EXPOSURE
On Monday, April 24th 2006, the US dollar fell to a new three-month low against the yen of
¥114.30/$ in Tokyo’s foreign exchange market, the lowest rate since January 16th 2006. This was a reflection of trading in New York three days earlier, on Friday, where the dollar had fallen more than 1.75% against the yen. The depreciation of the dollar against the yen was a direct result of a meeting of the G7 in Washington D.C. on April 21st 2006. In that meeting,
G7 leaders voiced dissatisfaction over the slow speed of China’s currency reforms since the renminbi’s revaluation in July 2005. They called for greater currency flexibility, particularly in China, sparking speculation that a stronger renminbi would boost other Asian currencies, including the yen.1 At the same time, the G7 called for more dialogue between oil-producing and oil-consuming countries, and further improvement in oil market transparency with “more complete and timely data on production, consumption and inventories, and for clear reporting of oil reserves”, while reaffirming the need to promote greater energy efficiency. 2 The benchmark crude-oil contract had reached yet another record high in New York at US$75.35 a barrel on April 21st 2006. With prices forecast to top US$80 in the near future, higher volatility in the yen–dollar exchange rate was expected [see Exhibit 1].
On that same Monday, Teruhide Osawa, president of OSG Corporation (“OSG”), was following the foreign exchange market from his office in Toyokawa, Japan. He looked at his computer screen and was very surprised to see that the yen had appreciated 1.75% against the dollar in one day. It made him wonder about the effect such a volatile exchange rate would have on OSG, a manufacturer of cutting tools used by industries worldwide. Although business had been prospering and did not pose any urgent problems, Osawa felt that he should not sit back and savour his success.
MITSURU MISAWA
OSG CORPORATION:
HEDGING TRANSACTION EXPOSURE
On Monday, April 24th 2006, the US dollar fell to a new three-month low against the yen of
¥114.30/$ in Tokyo’s foreign exchange market, the lowest rate since January 16th 2006. This was a reflection of trading in New York three days earlier, on Friday, where the dollar had fallen more than 1.75% against the yen. The depreciation of the dollar against the yen was a direct result of a meeting of the G7 in Washington D.C. on April 21st 2006. In that meeting,
G7 leaders voiced dissatisfaction over the slow speed of China’s currency reforms since the renminbi’s revaluation in July 2005. They called for greater currency flexibility, particularly in China, sparking speculation that a stronger renminbi would boost other Asian currencies, including the yen.1 At the same time, the G7 called for more dialogue between oil-producing and oil-consuming countries, and further improvement in oil market transparency with “more complete and timely data on production, consumption and inventories, and for clear reporting of oil reserves”, while reaffirming the need to promote greater energy efficiency. 2 The benchmark crude-oil contract had reached yet another record high in New York at US$75.35 a barrel on April 21st 2006. With prices forecast to top US$80 in the near future, higher volatility in the yen–dollar exchange rate was expected [see Exhibit 1].
On that same Monday, Teruhide Osawa, president of OSG Corporation (“OSG”), was following the foreign exchange market from his office in Toyokawa, Japan. He looked at his computer screen and was very surprised to see that the yen had appreciated 1.75% against the dollar in one day. It made him wonder about the effect such a volatile exchange rate would have on OSG, a manufacturer of cutting tools used by industries worldwide. Although business had been prospering and did not pose any urgent problems, Osawa felt that he should not sit back and savour his success.