Kona Macadamia Nuts
How much should Kona borrow in yen?
Kona receives cash collections of one hundred million yen per month. This is the source of repayment of any
balance sheet hedge. If Kona wants to be covered for one year at a time, it would need to borrow one year's
cash flow plus interest, and convert the borrowed yen to US dollar at once. A sample calculation would be:
One month's cash flow
Months per year
One year's cash flow
Principal and interest
Spot exchange rate
Realistically, Kona would probably want to be covered for the long term. In that case, the 1.2 billion yen loan
could be structured so that it could be renewed annually with interest reset annually. This would only cover the
foreign exchange and interest rate risk for a year at a time, but would probably be acceptable to a bank lender.
Also unknown are the expected sales for year 2 and beyond.
What should be the terms of payment on the loan?
The loan should be repaid out of the monthly cash flow, with payments on principal only. The interest payment one
year hence has already been covered by borrowing both principal and interest up-front.
Note: Kona should not borrow 250 million yen to cover only its balance sheet exposure. Such a loan would cover
only the accounting exposure, and not the cash flow exposure (operating exposure).
Kona Macadamia Nuts, based in Hilo, Hawaii, exports Macadamia nuts worldwide. The Japanese market is its biggest export
market, with average annual sales invoiced in yen to Japanese customers of ¥1,200,000,000. At the present exchange rate of
¥125/$ this is equivalent to $9,600,000. Sales are relatively equally distributed during the year. They show up as a ¥250,00,000
account receivable on Kona’ balance sheet. Credit terms to each customer allow for 60 days before payment is due. Monthly
cash collections are typically ¥100,000,000.
Kona Macadamia Nuts would like to hedge its yen receipts, but it has too many customers and transactions to make it practical
to sell each 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.