Reference no: EM131820598

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 £520,000 of its products, conditional upon delivery being made in three months’ time and the order invoiced in euros. 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. He thinks this is an unlikely possibility, but he decides to contact the firm’s banker for suggestions about hedging the exchange rate exposure. USD/ZAR USD/ZAR USD/CHF USD/CHF Maturity Bid Ask Bid Ask Spot 13.4442 13.4642 0.9942 0.9944 30-day 13.5092 13.5312 0.9928 0.9931 90-day 13.6622 13.6862 0.9889 0.9895 Mr. Peters learns from the banker that the current spot exchange rate is €/£ is 0.8505, thus the invoice amount should be €611,405. Mr. Peters also learns that the three-month forward rates for the pound and the euro versus the U.S. dollar are GBP/USD = 1.2687 and EUR/USD = 1.0810, respectively. The banker offers to set up a forward hedge for selling the euro receivable for pound sterling based on the EUR/GBP forward cross-exchange rate implicit in the forward rates against the dollar. As Mr. Peters is your uncle, and as he knows you are studying finance and forex at university, he has asked your advice. What advice (your advice can contain assumptions and can also pose questions on which your advice is conditional) would you give your uncle?