Reference no: EM133041152

Argentina Currency Devaluation

A long-simmering conflict between Argentina and the United Kingdom over the sovereignty of the Falkland Islands has begun to escalate. The UK has announced its intention to begin oil exploration on the island. The Argentine government has protested the UK's right to do so. The conflict has reignited tensions going back to the 1982 war between the two countries over the Falkland Islands. Because of the escalating tension, many investors are moving their money out of Argentine Pesos and into more stable currencies. This capital flight has caused the Argentine Peso to drop on foreign exchange markets.

Contribution after Marketing in Argentina for the period was 21% of sales (see Exhibit 2). Your goal is to maintain this percentage.

Exhibit 1: Exchange Rates

	Home Dollar ($)	Arg. Peso (ARS)	Bra. Real (BRL)	Chi. Peso (CLP)	Mex. Peso (MXN)	Peru Sol (PEN)	Ven. Bolivar (VEB)
Home		4.2974	1.9376	518.13	12.2699	2.9386	5.6786
Argentina	0.2327		0.4509	120.57	2.8552	0.6838	1.3214
Brazil	0.5161	2.2179		267.41	6.3325	1.5166	2.9307
Chile	0.0019	0.0083	0.0037		0.0237	0.0057	0.011
Mexico	0.0815	0.3502	0.1579	42.23		0.2395	0.4628
Peru	0.3403	1.4624	0.6594	176.32	4.1755		1.9324
Venezuela	0.1761	0.7568	0.3412	91.24	2.1607	0.5175

Exhibit 2: Argentina Contribution after Marketing

		ARS	%
Unit sales	46
Manufacturer Sales		325.9	100%
cost		183.3	40%
Gross Margin		142.6	44%
Total Marketing		73.3	23%
Contribution after Marketing		69.3	21%

Question:

Your group is currently operating in Argentina. AllStar management is concerned to what extent the Argentine Peso will be devalued. 

1. They want to examine two scenarios where the currency drops 15% and 25%. Currently, the exchange rate is 4.2974 Pesos to Dollars (see Exhibit 1). 

2. How would the devaluation of the Argentine Peso affect your contribution to the home currency ($)? 

3. How much more sales revenue would be needed in Argentina to maintain your current contribution?