Momul Tea Plantations and Factory, Inc. is located in Kericho, Kenya. The Momul family has been cultivating, processing, and exporting high-quality tea worldwide for the last 100 years. Momul Inc. is a member of the Rainforest Alliance and denominates all its financial and income in euros. Amongst other U.K. clients, Momul supplies different grades of black and green tea to Yorkshire Tea, a distinct U.K. tea brand. The average annual sales invoiced in British pounds to Yorkshire Tea are £12,000,000. The present exchange rate between the British pound and the euro is £0.722. Sales are relatively equally distributed throughout the year. Credit terms to each customer allow for 60 days before payment is due. Cash collections are £1,000,000 per month. Momul would like to hedge its pound receipts, but it has too many customers and transactions to make it practical to sell each receivable forward. It does not want to use options because they are considered to be too expensive for this particular purpose. Therefore, they have decided to use a “matching” hedge by borrowing British pounds at an annual interest rate of 3.5%.

a. How much should Momul borrow in British pounds?

b. What should be the terms of payment on the pound loan?

Answer rating: 100% (QA)

1Momul should not borrow GBP 12 million to cover only its balance sheet exposure Such a loan would c... View the full answer