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Mini Case 1 : SHREWSBURY HERBAL PRODUCTS, LTD Shrewsbury Herbal Products, located in central England close to the Welsh border, is an old - line
Mini Case : SHREWSBURY HERBAL PRODUCTS, LTD
Shrewsbury Herbal Products, located in central England close to the Welsh border, is an old
line producer of herbal teas, seasonings, and medicines. Its products are marketed all over the
United Kingdom and in many parts of continental Europe as well.
Shrewsbury Herbal generally invoices in British pound sterling when it sells to foreign
customers in order to guard against adverse exchange rate changes. Nevertheless, it has just
received an order from a large wholesaler in central France for of its products,
conditional upon delivery being made in three months' time, and the client insists that the order
should be invoiced in euros based on the current spot rate they don't want to take the FX risk at
all
Shrewsbury's controller, Elton Peters, is concerned with whether the pound will appreciate
versus the euro over the next three months, thus eliminating all or most of the profit when the
euro receivable is paid Profit percentage rate for this product is roughly He thinks this is
a likely risk, so he decides to contact the firm's banker for suggestions about hedging the
exchange rate exposure.
Mr Peters learns from the banker that the current spot exchange rate is
Mr Peters also learns that the threemonth forward rates for the pound and the euro versus the
US dollar are $ and $ respectively. The banker offers to set up a
forward hedge for selling the euro receivable for pound sterling based on the forward cross exchange rate implicit in the forward rates against the dollar.
a What is the exchange rate that would eliminate all the profit? Do you think it is likely or
not?
b What is the profit if British pounds appreciate by when the payment happens?
c What would you do to hedge if you were Mr Peters? According to the information above,
what will be your total proceeds in terms of British pounds after hedge? Is it higher or
lower than the original price? Why?
d After negotiation, the client agrees that the order could be invoiced either in euro
according to the spot rate, or in directly. With all the information, how would you invoice
your client?
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