The San Antonio Pearl Brewery Co. Pearl Brewery of San Antonio, Texas, has received an order for 10,000 cases of Pearl Beer from El Tacante Importers in Caracas, Venezuela. The Chavistas are furious! Beer from the Yankees!?...How could they! Payment to be in Bolivars Fuerte (VEF). The beer will be shipped to El Tacante under the terms of a Letter of Credit issued by the Bank of Caracas on behalf of El Tacante. The letter of credit specifies that the face value of the shipment, VEF 943,931 (Venezuelan Bolivars Fuerte), will be paid according to the following terms after the Bank of Caracas accepts a time draft drawn in accordance with the terms of the letter of credit.

Terms: 50% Down-payment at the Spot Rate

50% in 180 Days.

The current discount rate in Caracas on 180-day bankers acceptances is 2% per annum, and Pearls weighted average cost of capital is 12% per annum. The commission for selling a bankers acceptance in the discount market is 1% of the face amount.

(a) Would the Pearl Brewery Company gain by holding the acceptance to maturity as compared to discounting the bankers acceptance at once?

(b) How might they manage these risks given the information below? (Forward Hedge, Option Hedge, or Money Market Hedge

(c) Assume that Venezuela charges a duty of 15% on goods imported into Venezuela from the US. The Pearl Brewery Co. in the previous question discovers that it can brew beer in Valencia near Caracas in Venezuela and bypass this 15% value added tax.

List all the factors that the Pearl Brewery Co. should consider when deciding to continue to export beer from San Antonio versus brewing beer in Valencia. Despite this added 15% surcharge, suppose that the Valencia facility could produce the following free cash flows in millions of VEFs:

Year: 0 1 2 3 4 5

Cash Flows: -8.5 1.5 3.5 3.0 2.0 5.5

The nominal interest rate in the US is 4% (30-year T-Bond) while the rate in Venezuela is 10% (30-year Sovereign). The current Spot Rate is: VEF 6.29287/$ as of 6/28/2013. The 180-day Forward Rate is: $ 0.15700/ 1 VEF. Venezuelan lending rates are 6%. The 180 day strike price for the Put Option to sell the VEF is: $0.15695/VEF with a 0.4 cent premium per VEF. Does this make sense to produce this fine beer in Valencia? Justify your response!