Asia-Pacific Hotels International: Managing Short Term Cash in the Derivatives Market

This case deals with a cash management problem for an international hotel based in Seoul, Korea. Although successful in its core hotel operations, the firm has not been as successful in managing its short term cash flow. Part of the firm's operating and materials costs are in US dollars although all of its operating incomes are in the local currency, the South Korean won. This imbalance creates a currency risk exposure in the management of the firm's working capital. To ensure that it has sufficient funds to pay its dollar-denominated costs, the firm is considering the investment in a sizeable amount of dollar-denominated time deposits. Pursuing this strategy, however, involves a two-fold global dimension: First, the firm must determine what exchange rate conditions would make it suitable to invest in dollar-denominated time deposits rather than in the local currency. Second, for any such dollar-denominated short-term investments, the firm must decide when and how to use the facilities of the Eurodollar futures market to hedge the currency risk exposure. The specific approach being considered includes a combined position in Eurodollar time deposits and Eurodollar futures contract. This case presents an opportunity to learn how firms can successfully combine short-term investments in a foreign currency-denominated time deposit with positions in the derivatives markets, the aim of which is to manage exposure to currency risk.