Merton Electronic Corporation

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Merton Electronics Corporation About company -Since its founding in 1950 by Thomas Merton, Merton Electronics had been a distributor for GEC, a large manufacturer of electrical and electronics products for consumer and institutional market. -Over the years, in addition to the GEC products, the company had added noncompeting lines of electrical appliances, records, compact discs, and cassettes. -Four years later, it entered into an exclusive import agreement with the Goldstone Corporation of Taiwan, a major producer of television and other electronic equipment. -By the beginning of the 1990s, the company had entered into the personal computer (PC) market distributing both hardware and software products. -In September 1993, company…show more content…
As a result of this analysis, they had sought the advice of their banker. The advice was taken and since 1996: 1. Merton had systematically hedged each yen purchase order: Merton Electronics imported a higher portion of its products from Japan than some of its principle competitors, its profit margins were much more sensitive to the value of the yen than their were. The bank explained the hedges would fix in advance the dollar cost of each month’s orders. 2. Purchases from Taiwanese suppliers were not hedged: The bank told them the Taiwanese authorities managed their currency so that it stayed more or less fixed to the U.S. dollar, that even if it were to move it was likely to depreciate, and for these reasons, hedging would not be worthwhile. During 1997, by hedging, the dollar cost of yen purchases had been about $25.5 million. If the purchases had not been hedged, but the yen bought on the spot market when the invoices came due, the dollar cost would have been about $24.6 million-almost $900,000 difference! This was almost exactly the pre-tax earnings for 1997. Extremely disturbed by what Brown told her, Patricia Merton immediately contacted the firm’s Banker. Somewhat defensive, he maintained that since neither he, nor anyone else for that matter, could have accurately predicted how the yen-dollar exchange rate would have moved during the past two years, hedging the exposures was the most prudent policy for Merton.
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