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International Corporate Finance: Value Creation with Currency Derivatives in Global Capital Markets, + Website by Laurent Jacque

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CASE STUDY 11.1

Warrick Pharmaceuticals Inc.

This case study accompanies Chapter 11 of International Corporate Finance.

In May 2003, the export manager and deputy international treasurer of Warrick Pharmaceuticals Inc. (WPI), Albert Brill, was informed that accounts receivable from shipments of pharmaceuticals to Venezuela were overdue to the extent of more than $3,000,000. Mr. Brill had been aware for a number of months of the deteriorating situation in the Venezuelan foreign exchange market, and he believed that a review and appraisal of the situation was urgently called for. Indeed, the exchange market in Venezuela had now degenerated into a three-tiered system, with the black market rate having plunged to bolivar (VEB) 3,300 to the dollar.

Warrick Pharmaceuticals Inc.—a Minneapolis-based pharmaceutical company—had first entered the Venezuelan market in the early 1960s, supplying hospitals, pharmaceutical distributors, and general importers with proprietary drugs and pharmaceutical products. The past 20 years had been an era of steady and expanding exports buoyed by the healthy state of the Venezuelan economy; Venezuela now accounted for nearly 10 percent of WPI's total export activities (but only 2.5 percent of its total turnover). On average, WPI had been shipping $600,000 worth of pharmaceuticals every month to various distributors in Venezuela.

Because WPI was dealing with well-established import houses and repeat orders, its usual practice was to draw a 90-day bill denominated ...

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