Hedging continual economic exposure

Reference no: EM1345984

Consider a real-world dilemma face by many firms that rely on exporting. Clark Financing, Inc. produces its products in its factory in Texas and exports most of the products to Mexico each month. The exports are denominated in pesos. Clark Financing Inc. recognizes that hedging on a monthly basis does not really protect against long-term movements in exchange rates. It is also recognizes that it could eliminate its transaction exposure by denominating the exports in pesos, but that it still would have economic exposure (because Mexican consumers would reduce demand if the peso weakened). Clark Financing does not know how many pesos it will receive in the future, so it would have difficulty even if a long-term hedging method was available.

How can Clark Financing realistically deal with this dilemma and reduce its exposure over the long-term? Keep in mind there is no perfect solutions.

Reference no: EM1345984

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