Reference no: EM133032442

1. You are the CFO of a U.S. firm whose wholly owned subsidiary in Mexico manufactures component parts for your U.S. assembly operations. The subsidiary has been financed by bank borrowings in the United States. One of your analysts told you that the Mexican peso is expected to depreciate by 30 percent against the dollar on the foreign exchange markets over the next year. What actions, if any, should you take? "

When a foreign currency depreciates against the U.S. Dollar, in this case the Mexican peso, the peso's value falls, and the US dollars demand increases as its value rises. A foreign currency fluctuation can significantly affect sales and profit of a firm. In the given scenario, one any USD denominated costs related to assembly operations will be more expensive as it will require more peso to buy USD to spend on input materials, shipping, manufacturing and selling of the firm's products in the foreign market. On the flip side, any peso-denominated costs will be cheaper as these costs will require less dollars to convert to peso. Also, repayment of the borrowings financed in the US will also more expensive to pay back as it will also require more peso to convert in order for the firm to afford payments and interests in dollars. As the CFO, several actions that I can take include:

• Settle any USD denominated account payables before the peso depreciates.

• Collect foreign receivables before the expected depreciation to minimize loss in value.

• Restock USD-denominated inventory before depreciation occurs. Buy peso-denominated inventory after depreciation.

• Convert or invest using operating peso accounts to USD prior to depreciation to minimize loss in value and also for the purpose of setting aside for future payments to US financed borrowings.

• Enter into forward exchange contracts in order to protect the firm from exposure to foreign exchange fluctuations.

2. "You are the CFO of a U.S. firm whose wholly-owned subsidiary in Mexico manufactures component parts for your U.S. assembly operations. The subsidiary has been financed by bank borrowings in the United States. One of your analysts told you that the Mexican peso is expected to depreciate by 30 percent against the dollar on the foreign exchange markets over the next year. What actions, if any, should you take? "