Question

A Mexican company manufactures televisions sets by importing materials into the country and then exporting the finished product to the United States. The cost per unit in Mexican Pesos of the components and materials needed for the TV are as follows:

a) Microchips from China: 5,300 MXN (Mexican Pesos)
b) Screen from Northern Mexico: 2,730 MXN
c) Plastics from India: 3,565 MXN
d) Electronics from U.S.: 2,342 MXN
Your vacation package gives you the option to pre-pay now or pay once you get there. The US dollar’s value is expected to decrease/depreciate in the near future. Should you pre-pay or pay later? What would be a better deal?

Answer 1

Given the expected depreciation of the US dollar, pre-paying for the vacation package now would likely save money as it locks in the current exchange rate, potentially being more cost-effective than paying later when the dollar might be weaker.

Step-by-step explanation:

Considering the expectation that the US dollar's value is going to depreciate in the near future, it would be wiser to pre-pay for your vacation package now rather than later.

This strategy is based on the exchange rate market dynamics where the value of the dollar against other currencies plays a significant role in the cost of purchases made in foreign currencies.

As observed in the case of the Mexican Peso reacting to expectations about future exchange rates, we know that a currency will appreciate if the demand for it increases or if there is less supply available in the exchange market. In this scenario, if the dollar is expected to lose value, it means the vacation package could become more expensive if you pay later. Pre-payment would lock in the current exchange rate, potentially saving you money if the depreciation of the dollar does occur as expected.