Current Discussion

Current Discussion 4

FIN 333 - Professor. Singh

Dishu Yang, Zongqin Wu

November 29, 2017

There are some cross border risks, such as currency exposure, tax risk, government risk. If Neo Berry signs the agreement with Berry World, the main productions are in the South Africa. They will transport the blueberries to UK and Europe. All foreign sales are invoiced in the destination currency. Berry World collects the cash from the wholesalers/distributors in UK and Europe and pays Neo Berry in SARs based on the spot exchange. Since most of the sales are from UK and EU, and sales in SA is only 5%, the currency exposure would be a big effect.

Tax risk is that the company might be taxed differently in the future. In the article, it says pre-tax return of 30 to 40 percent over its lifetime. However, there might be change in the tax policy in the future. For example, if the presidency changes, the tax policy might be changed. Legal risk is the uncertainty about organization’s exposure to future legal actions. If there’s any policy change regarding the sale of license, or even the innovation of plant genetics, it will also affect the company’s sales.

From exhibit 1, the british pounds kept growing from 2015 to 2016 but falling from 2016 to 2017. Thus, it’s better for Neo Berry to buy ZAR from 2016 to avoid the decrease of spot rate. From exhibit 2, EUR to ZAR had a huge decrease from 2016 to 2017. They can buy a call option in ZAR, through which they can buy the ZAR before maturity. For the tax rate, in the future if the tax rate change, Neo Berry could hedge its position with a company in a jurisdiction with a low corporate income tax rate.

For  the policy change, Neo Berry and Berry World should focus on the updated news or information about the government policy, just in case that they can prepare before the worst scenario happens.

The currency exposure risk should be mitigated at the operational stage. Since the British pounds changed from increasing to decreasing during the year 2016, Neo Berry could buy ZAR in 2016 to prevent loss. During the operational stage, the employees could calculate the approximate amount of money needed in the project. After deciding the total costs, the company could use derivative like option contracts to mitigate the currency exposure risk. For the governmental and legal risk, it should be mitigated at the contract signing stage. The Neo Berry signed the agreement to produce products in the South African and transport blueberries to UK and Europe. The cross-country transaction might cause some legal problems due to the differences in different countries’ policies. For example, European countries might have different agricultural standards with that of South Africa. To avoid conflicts in the future, the contract should address the legal problems before signing it. Last, the tax risk could be hedged during the operational stage. The tax risk could be reduced depending on the current tax rate. If tax rate is higher than normal, the company could transfer the money to foreign countries to avoid the taxation.