The Company Callaway Golf Company, a US-based corporation, designs, manufactures and markets high quality, innovative golf clubs and products. The company generates approximately 35% of its revenues from international sales. Business Situation Callaway has a ¥1,250,000,000 receivable due from its Japanese distributor on September 15, The company wishes to limit its exposure to significant adverse changes in the yen-dollar exchange rate through the use of a derivatives-based risk management strategy.

Current Situation Long Yen receivable of 1,250,000,000 Current position is +100F Chicago Mercantile Exchange (CME) currency futures. Symbol: JYU9 Contract Size: 12,500,000 Yen per contract Futures Contracts as of April 30, 1999: June September December

Risk Guidelines The Board of Callaway Golf is concerned about experiencing currency losses similar to those which the company endured during the recent Asian economic crisis. The Board has decided to establish the following guidelines for risk: Expected 15% margin on sales. Will accept a one-third loss of margin with 5% probability. Total Contract Value:$10,657,500 Expected Margin:$1,598,625 VAR Limit:$532,875

Risk Assumptions & Sources

Initial Long Futures Position

Adjusted Futures Price Risk

Futures Hedge Scenario Long 100 Futures contracts exceeds our risk limits. However, selling 63 September Yen contracts will limit our monthly risk to $528,447, within our established risk parameters. Within the context of our stable Yen view, the maximum gain and loss from our fractional futures hedge when the Yen moves within 1.65 standard deviations is $43,475 and -$44,400 respectively.

Fractional Futures Hedge

Market Views - Japanese Yen We are concerned about adverse movements in the value of the Yen. Currency The Japanese Yen is widely expected to stay in a ¥ /US$ range.. Few investors expect a sharp Yen sell-off to, say, ¥ /US$ or beyond. Government acceptance for a weaker Yen is likely to prove temporary. Some feel that a stronger Yen could emerge in the first quarter or two of the 2000 fiscal year (Starting March 1999). Our View Our most likely expectation is that volatility will remain subdued and there is limited probability that the Yen will appreciate versus the US$. Reason: The pace of economic deterioration has clearly moderated - helped by the enormous fiscal stimulus and the bank restructuring package – but the bottom has probably not yet been reached. Most believe that the trough in activity is already close at hand although concerns are expressed that the impact of the fiscal stimulus package will diminish after the summer.

Option Scenarios We have assumed rather wide ranges for our option strategies to reflect the increased risk of the positions. However, even in extreme scenarios, the maximum loss of our positions is within our risk parameters. The OTM and ITM calls and puts used have exercise prices reflecting our view that the Yen volatility will be minimal over the next few months. Scenario One: Stable and indifferent on direction - Synthetic Short Stangle -Cotm -Potm = +F -Cotm -Citm Scenario Two: Limited up, maybe down big - Synthetic Bull Spread +F +Potm -Cotm Scenario Three: Up and unsure - Synthetic Long Call +F +P Scenario Four: Modified Butterfly Spread +F +Potm +Cotm -Catm

Scenario One - Synthetic Short Strangle

Scenario Two - Synthetic Bull Spread

Scenario Three - Synthetic Long Call

Scenario Four - Modified Butterfly Spread

Conclusions Callaway Golf currently uses option strategies in its currency hedging. Therefore, although the fractional futures hedge is the least costly, it is not the most desirable. Based on our market views, our risk parameters, and the cost of establishing an option-based hedging strategy, we recommend the Synthetic Bull Spread. While the Synthetic Short Strangle is also appealing in that it is profitable at the current Yen futures price, if the Yen volatility is to increase dramatically, we may experience some rather unfavorable outcomes.