MINI CASE: SHREWSBURY HERBAL PRODUCTS, LTD.

ShrewsburyHerbal 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.ShrewsburyHerbal 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 320,000 of its products, conditional upon delivery being madein three months time and the order invoiced ineuros.Shrewsburyscontroller, Elton Peters, is concerned with whether the pound will appreciate versus theeuroover the next three months, thus eliminating all or most of the profit (AssumeShrewsburysells at a 20% markup) when theeuroreceivable is paid.

He thinks this is an unlikely possibility, but he decides to contact the firms banker for suggestions about hedging the exchange rate exposure. Mr. Peters learns from the banker that the current spot exchange rate is / is 1.4537, thus the invoice amount should be 465,184. Mr. Peters also learns that the three-month forward rates for the pound and theeuroversus the U.S. dollar are $1.8990/1.00 and $1.3154/1.00, respectively. The banker offers to set up a forward hedge for selling theeuroreceivable for pound sterling based on the / forward cross-exchange rate implicit in the forward rates against the dollar.

What would you do if you were Mr. Peters?

What more information would you need?

Design an international financing strategy for this company, stating any assumptionsyouvemade along the way.

Your answers should not exceed two-pages (2) double-spaced (typed). Equations, math, graphs, ETC are exempt from this limit and can be put in an appendix.