Milan Pharmaceuticals SpAs Intra-Company Hedging. Milan Pharmaceuticals SpA is an Italian multinational that has developed a vaccine
Question:
Milan Pharmaceuticals SpA’s Intra-Company Hedging.
Milan Pharmaceuticals SpA is an Italian multinational that has developed a vaccine for the Ebola virus. It recently established a new subsidiary in Cape Town, South Africa, and is now in the process of establishing operating rules for transactions between the Italian parent company and the Cape Town subsidiary.
Alberto Fognini was International Treasurer for Milan and was leading the effort at establishing commercial policies for the new subsidiary.
Milan’s first shipment of product to South Africa was upcoming. The first shipment would carry an intracompany invoice amount of €2,000,000. The company was now trying to decide whether to invoice the South African subsidiary in euros or South African rand (ZAR) and, in turn, whether the resulting transaction exposure should be hedged. Alberto’s idea was to take a recent historical period of exchange rate quotes and simulate the invoicing and hedging alternatives available to Milan to try and characterize the choices.
Alberto looked at the 90-day period, which had ended the previous Friday (standard intra-company payment terms for transcontinental transactions was 90 days). The quarter had opened with a spot rate of ZAR16.43/€, with the 90-day forward rate quoted at ZAR15.95/€ the same day. The quarter had closed with a spot rate of ZAR17.85/€.
a. Which unit would have suffered the gain (loss)
on currency exchange if intra-company sales were invoiced in South African rand (ZAR), assuming both completely unhedged and fully hedged?
b. Which unit would have suffered the gain (loss)
on currency exchange if intra-company sales were invoiced in euros (€), assuming both completely unhedged and fully hedged?
Step by Step Answer:
Multinational Business Finance
ISBN: 9781292270081
15th Global Edition
Authors: David Eiteman, Arthur Stonehill, Michael Moffett