Merck Pharmaceutical is a MNE with an enormous operating exposure problem. Merck does all of its product research and development and manufacturing in the United States. Because of the capital and technical requirements of the pharmaceutical industry, diversification of its operations is not financially practical. Once all pharmaceutical products are produced, they are distributed and sold worldwide in over 60 countries through local sales agents, offices, or affiliates. Because all local markets pay in local currencies, Merck (U.S.) ends up long in a multitude of currencies. Pharmaceutical prices are typically regulated by host country governments. Because most individual drug companies have their own niche products, complete with patents and licenses, individual market volume sales are relatively predictable. Competition between companies is focused in the R\&D stage, not in the marketplace for existing products.

a. Why does Merck have an enormous operating exposure?

b. What potential operating or contractual hedging strategies might be appropriate for Merck's long positions in forcign currencies?

c. How far into the future would these hedges need to be placed in order for Merck to yield true benefits? How effective are these strategies likely to be in the long run?