Question

You are the CFO of a US 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

Answer:

Explanation:

When the Peso depreciates by 30%, the firm can save money on the costs of production as the inputs would be less costly but the market for the firm in Mexico would be affected negatively as the depreciation of the peso would mean that now, the consumer can buy more goods with the same amount of money which will increase the demand. The loans that the subsidiary has taken would also be affected as it has to pay more for the collateral.

If the company reduces the inventory and stock the foreign receivables before the depreciation occurs to minimize the loss. Before the depreciation happens, the firm can convert the pesos denomination to the dollar so that its value doesn't fall.