Question

ou 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?

Answer 1

As the CFO of a U.S. firm with a subsidiary in Mexico, you could consider hedging, reevaluating financing, and adjusting pricing strategies in response to the expected depreciation of the Mexican peso.

Step-by-step explanation:

If the Mexican peso is expected to depreciate by 30 percent against the dollar on the foreign exchange markets over the next year, as the CFO of a U.S. firm with a wholly owned subsidiary in Mexico, there are a few actions you could consider taking:

1. Hedging: You could enter into a currency hedging contract to protect against the potential losses from the peso depreciation. This would involve locking in a future exchange rate, reducing the impact of exchange rate fluctuations.
2. Reevaluate financing: Since the subsidiary is financed by bank borrowings in the United States, you could consider renegotiating the terms of the borrowing to reduce the risk associated with the peso depreciation. This may involve exploring options such as swapping the borrowing from dollars to pesos or obtaining financing from local Mexican banks.
3. Adjust pricing: Depending on the competitiveness of the market, you could consider adjusting the pricing of your products to account for the potential increase in costs resulting from the peso depreciation. This would help maintain profitability despite the currency fluctuations.