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Honda and hedging

Posted by: Ian Rowley on January 31, 2006

Normally a weaker yen is great news for a company like Honda. All those Accords, Civics, and Ridgelines sold in the U.S. help dollar sales account for around 70% of the company’s operating profits each year. And as you’d expect, those dollars look even better when results are announced back home in Tokyo if the yen weakens. So it’s perhaps no surprise that after the yen sank to an average of 117 to the dollar during the final quarter of 2005 that Honda today posted some great numbers at its latest quarterly results announcement. Indeed, CFO Satoshi Aoki was in a position to preside over record net sales and record operating income of $1.67 billion—a rise of 23.7% on the same three months a year earlier. There’s no doubt currency fluctuations gave the figures a boost. Honda says sales, which increased by 15.8% to just under $21 billion, would have increased by 7.3%, if exchange rates had remained unchanged from the same period in 2004.

Unfortunately, Honda’s finance wizards spoiled the show somewhat. The problem: the yen weakened too quickly for Honda’s currency hedging strategy, which had expected a yen-dollar rate of around 110 not 117. That was one factor which left Aoki explaining why net income was down 11.6% to $1.13 billion compared to the same period in 2004 despite just about every other indicator heading the other way. A fall in the value of Honda’s stake in Washington-based XM Satellite was another. Still, as GM executives which presided over a $4.8 billion quarterly loss last week would doubtless agree, a billion of profit for three months probably isn’t too bad in the greater scheme of things.

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