Gaga Communications Inc says it's happy to bet that Rush Hour 2, an action film by AOL-Time Warner Inc, will be a hit with Japanese moviegoers.
A risk Japan's largest independent film distributor won't take, though, is whether the dollars it pledges to pay for the film will rise or fall in value before the bill arrives.
"Our policy is to stay away from currency risks," said Gaga's chief financial officer Yukihiko Sakai. "That's why we're happy to hedge."
Gaga said it cuts the foreign exchange risk of buying US movies, the biggest American export to Japan by market share, by purchasing dollars at two-year forward rates, locking in the currency's value against the yen. The Tokyo-based company, which reported ?509 million (US$4.17 million) in net income in the year to Sept. 30, said it's usually about two years between the time it agrees to buy a film and pays for it.
Gaga could buy dollars today at ?112.26, compared with the current exchange rate of ?122 to the dollar, with delivery and settlement in two years. That's because the difference between US interest rates and those in Japan is about 3.6 percentage points. The higher the interest rate, the lower the present value of an asset at a given time in the future.
"Given the rate gap between the US and Japan, we pay less if we could get longer-term forward contracts," said Sakai. Gaga started using the one-year forward rate in 1995, and has gotten two-year and three-year contracts since last July, he said.
Immediately after returning from film-buying trips abroad, Gaga makes forward dollar-purchase contracts with banks in preparation for paying about 10 percent of films' total production costs as a minimum guarantee -- the fee required to obtain rights to distribute motion pictures in Japan.
The company, which usually buys films before production is complete, pays in installments over about two years.
"Gaga's risk-reduction strategies are beginning to bloom," said Yoshiyuki Kinoshita, an analyst with Merrill Lynch Japan Inc, who has a "intermediate-term buy" rating on Gaga, which debuted on NASDAQ Japan in June.
As part of its risk reduction strategy, Gaga has secured a ?5 billion one-year syndicated loan set up last month with banks.
That makes it easier to buy films quickly by avoiding fund-raising delays.
The company also spreads the cost of acquiring movies by buying film-distribution rights jointly with local TV stations, which will air the pictures after they've finished showing in cinemas.
Gaga, which had hits in the past two years with US films Green Mile, and Hannibal, is willing to wager on its ability to pick winning movies. The company said it has found a way to cut that risk as well.
The 16-year-old film distributor uses LINDA, or Latest, Integrated Navigation System with Data Analysis, a database of box office receipts on 7,000 to 8,000 films screened in Japanese theatres since 1989, to forecast how much they're likely to earn from a given movie.
Still, Gaga's risk-reduction tactics don't allow it to ignore shifts in the Japanese currency's value.
The yen plunged 5 percent to about ?148 to the US dollar, then an eight-year low, from February to August 1998 amid a Japanese banking crisis and a raft of bankruptcies, including the 1997 failure of Yamaichi Securities, then the nation's No. 4 brokerage.
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