Which it agrees to swap dollars for pesos

Reference no: EM133369985

Question: JKL is a manufacturer. Its operations are primarily in the U.S. but it also has some production plants in Mexico, and thus it sometimes takes out fixed-rate loans that are denominated in Mexican pesos. These loans expose JKL to foreign exchange risk. That is, if the peso appreciates (depreciates), it will cost JKL more (fewer) dollars to pay the interest on its peso-denominated loans. JKL hedges this risk by entering into currency swaps in which it agrees to swap dollars for pesos. (Currency swaps are a type of derivative.) That is, JKL agrees that on the end of each month it will pay a fixed amount of dollars to the counterparty in exchange for a fixed amount of pesos.

Reference no: EM133369985

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