Q1. Ever Strong Pharmacy Berhad (ESPB) is a Malaysian pharmaceutical company that develops and produces its own brand of nutrition supplement and weight management products as well as imports some high quality nutrition supplement products from the United States and Europe. These products will then be sold in its 20 pharmacy outlets throughout Malaysia, half of which are located in Klang Valley. Each quarter, ESPB will import 10,000 bottles of Isotonix OPC-3 and 10,000 bottles of Isotonix Vision Plus from Isotonix Inc. based in the United States. The cost price of each bottle of 900 grams Isotonix OPC-3 is USD 80, while the cost price of each bottle of 900 grams Isotonix Vision Plus is USD 60. Isotonix Inc. allows three months credit term to ESPB before payment is due. Isotonix OPC-3 is formulated from grape seed, red wine and pine bark extracts, which helps to provide antioxidants to the human body, reduce cholesterol and blood sugar levels to the optimal, and improve cardiovascular health, joint health and skin health. Isotonix Vision Plus is formulated with high content of lutein, astaxanthin and beta carotene, which helps to provide antioxidants to both the brain and eyes and protect both the brain and vision from degeneration. Both Isotonix OPC-3 and Isotonix Vision Plus just needs one serving per day by mixing 10 grams of the powder with 150 millilitres of drink water. When ESPB sells these supplements to its customers in the pharmacy outlets, ESPB mark ups the selling prices by 25 percent from the respective cost prices. ESPB has always maintains a good cash flow management and has a surplus cash sufficient to support six months business operations all the time. It has a weighted average cost of capital of 14 percent. The current spot exchange rate of MYR/USD is 4.2000 4.2180. The 90-day money market interest rates are 2.00 2.30 percent per annum in Malaysia and 3.50 3.70 percent per annum in the United States. 90-day call option on USD with a strike rate of MYR4.1860/USD is available at a premium of 1.50 percent, while 90-day put option on USD with a strike rate of MYR4.2460/USD is available at a premium of 3.40 percent. Besides, ESPB also exports its own brand of nutrition supplements such as ESP Vitamin B Complex, ESP Vitamin C Complex and ESP Multivitamin to its distributors in some Latin American countries, including Brazil, Argentina, Uruguay and Colombia. These distributors are independent companies and not the subsidiaries of ESPB. ESPB usually provides one-month credit term to all these Latin American distributors. Required: (a) Develop a money market hedge strategy for ESPB on its payables to Isotonix Inc. and calculate the total payment in MYR. (12 marks) (b) Develop a currency option hedge strategy for ESPB on its payables to Isotonix Inc. and calculate the total payment in MYR assuming that the option is exercised at the end of the 90 days. (12 marks) (c) Calculate the breakeven future spot rate of MYR/USD and interpret which of the two contractual hedging strategies is preferable above and below the breakeven future spot rate. (6 marks) (d) Differentiate between pricing strategy and invoicing strategy in hedging foreign exchange exposure. Recommend how ESPB should alter its pricing strategy and invoicing strategy under the scenarios it expects those Latin American currencies to weaken and strengthen against the Malaysian Ringgit respectively. (10 marks) Q1. Ever Strong Pharmacy Berhad (ESPB) is a Malaysian pharmaceutical company that develops and produces its own brand of nutrition supplement and weight management products as well as imports some high quality nutrition supplement products from the United States and Europe. These products will then be sold in its 20 pharmacy outlets throughout Malaysia, half of which are located in Klang Valley. Each quarter, ESPB will import 10,000 bottles of Isotonix OPC-3 and 10,000 bottles of Isotonix Vision Plus from Isotonix Inc. based in the United States. The cost price of each bottle of 900 grams Isotonix OPC-3 is USD 80, while the cost price of each bottle of 900 grams Isotonix Vision Plus is USD 60. Isotonix Inc. allows three months credit term to ESPB before payment is due. Isotonix OPC-3 is formulated from grape seed, red wine and pine bark extracts, which helps to provide antioxidants to the human body, reduce cholesterol and blood sugar levels to the optimal, and improve cardiovascular health, joint health and skin health. Isotonix Vision Plus is formulated with high content of lutein, astaxanthin and beta carotene, which helps to provide antioxidants to both the brain and eyes and protect both the brain and vision from degeneration. Both Isotonix OPC-3 and Isotonix Vision Plus just needs one serving per day by mixing 10 grams of the powder with 150 millilitres of drink water. When ESPB sells these supplements to its customers in the pharmacy outlets, ESPB mark ups the selling prices by 25 percent from the respective cost prices. ESPB has always maintains a good cash flow management and has a surplus cash sufficient to support six months business operations all the time. It has a weighted average cost of capital of 14 percent. The current spot exchange rate of MYR/USD is 4.2000 4.2180. The 90-day money market interest rates are 2.00 2.30 percent per annum in Malaysia and 3.50 3.70 percent per annum in the United States. 90-day call option on USD with a strike rate of MYR4.1860/USD is available at a premium of 1.50 percent, while 90-day put option on USD with a strike rate of MYR4.2460/USD is available at a premium of 3.40 percent. Besides, ESPB also exports its own brand of nutrition supplements such as ESP Vitamin B Complex, ESP Vitamin C Complex and ESP Multivitamin to its distributors in some Latin American countries, including Brazil, Argentina, Uruguay and Colombia. These distributors are independent companies and not the subsidiaries of ESPB. ESPB usually provides one-month credit term to all these Latin American distributors. Required: (a) Develop a money market hedge strategy for ESPB on its payables to Isotonix Inc. and calculate the total payment in MYR. (12 marks) (b) Develop a currency option hedge strategy for ESPB on its payables to Isotonix Inc. and calculate the total payment in MYR assuming that the option is exercised at the end of the 90 days. (12 marks) (c) Calculate the breakeven future spot rate of MYR/USD and interpret which of the two contractual hedging strategies is preferable above and below the breakeven future spot rate. (6 marks) (d) Differentiate between pricing strategy and invoicing strategy in hedging foreign exchange exposure. Recommend how ESPB should alter its pricing strategy and invoicing strategy under the scenarios it expects those Latin American currencies to weaken and strengthen against the Malaysian Ringgit respectively. (10 marks)