Question

Headquartered in the U.S., Merck is a leading multinational pharmaceutical company that does business in more than 100 courtiers. More than 50 per cent of its sales are made abroad and foreign sales are billed in local currencies. Merck spends large sums of money on research and development which is critical or enhances its competitive strength. A major concern for the management is that unexpected foreign exchange losses could curtail its research and development outlays which are essential for its success. So, Merck‟s risk management programme is designed to reduce the likelihood of such an outcome.

a. Explain Merck addressed the issues through various steps when its risk management programme was put in place.

b. What are the various ways of minimizing foreign exchange losses

Answer 1

For any big international company such as Merck, the risk of international exposure and foreign currency risk is substantial. So it established a risk management program wherein following steps were taken

1) Evaluation of foreign currency exposure

2) Establishment of thresholds of maximum exposure which could be undertaken without a hedge in place

3) Work on expanding the global sales portfolio to establish a natural hedge for its foreign currency exposure

4) Train and equip it's treasury team to take necessary positions in the derivative markets to fully cover the foreign currency exposures at optimised costs

B) The various ways to minimise foreign exchange losses are

1) Build a natural hedge through expansion of global markets in terms of procurement and supply of goods. In this way receivables and payables would cancel each other

2) Take position in the financial derivatives market through buying of forwards, futures and options to cover the foreign exchange risks and lock in prices