MBA303 - International Finance - Case Study - Finance Assignment Help

Assignment Task

Question 1:
a) Over the past five years, the exchange rate between British pound and U.S. dollar, $/£, has changed from about 1.69 to about 1.31. Would you agree that over this five-year period British goods have become cheaper for buyers in the United States? Justify your answer.

b) Iowa Co. has most of its business in the United States, except that it exports to Portugal. Its exports were invoiced in Euros (Portugal’s currency) last year. It has no other economic exposure to exchange rate risk. Its main competition when selling to Portugal’s customers is a company in Portugal that sells similar products, denominated in Euros. Starting today, it plans to adjust its pricing strategy to invoice its exports in U.S. dollars instead of Euros. Based on the new strategy, will Iowa Co. be subject to economic exposure to exchange rate risk in the future? Briefly explain.

c) Explain how a global recession like the financial crisis in 2008–2009 can encourage some governments to impose more trade restrictions.

Question 2:
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 £320,000 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.
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 the euro versus 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 the euro receivable for pound sterling based on the €/£ forward cross-exchange rate (hint: which you need to calculate). If you were Mr. Peter and you would like to keep your commercial relationships with France and the United States, what would you do? Show the correct calculation based on the decision.

This MBA303 - Finance Assignment has been solved by our Finance experts at My Uni Paper. Our Assignment Writing Experts are efficient to provide a fresh solution to this question. We are serving more than 10000+ Students in Australia, UK & US by helping them to score HD in their academics. Our Experts are well trained to follow all marking rubrics & referencing style.