Question

1 IUDICIT 10 (diyurithmic) Question Help ! Elan Pharmaceuticals. Elan Pharmaceuticals, a U.S.-based multinational pharmaceutical company, is evaluating an export sale of its cholesterol-reduction drug with a prospective Indonesian distributor. The purchase would be for 1,700 million Indonesian rupiah (Rp), which at the current spot exchange rate of Rp9,490/S, translates into $179,135.93. Although not a big sale by company standards, company policy dictates that sales must be settled for at least a minimum gross margin, in this case, a cash settlement of $172,000. The current 90-day forward rate is Rp9,990/$. Although this rate appeared unattractive, Elan had to contact several major banks before even finding a forward quote on the rupiah. The consensus of currency forecasters at the moment, however, is that the rupiah will continue to strengthen, possibly rising to Rp10.220/S over the coming 90 to 120 days. Analyze the prospective sale and make a hedging recommendation. How much in U.S. dollars will Elan receive in 90 days without a hedge if the expected spot rate in 90 days is assumed to be Rp9,490/? $ (Round to the nearest cent.) Enter your answer in the answer box and then click Check Answer. 4 parts remaining Clear All Check Answer

Answer 1

Amount received without hedge = amount in Rupiah / expected spot rate

Amount received without hedge = 1700 million / 9490

Amount received without hedge = $179,135.93

If the spot rate after 90 days is 10,220, amount received =  1700 million / 10220 = $166,340.51.

If the spot rate rises to 10220, the sale is not viable as per company policy because the amount received in $ is less than $172,000. Therefore it is recommended to hedge.