There is an increasing demand in the US to learn Spanish because many students want to study abroad in Latin American countries and an increase Hispanic population in the US. Now given your company experiences in teaching English in Mexico, strategically your company decided to produce Spanish learning package including multimedia materials in Mexico and then imports them back to the US for Americans who want to learn Spanish. Recall that your Mexican business operation cost is in pesos, earnings from export of English learning package sales and tuition are also in pesos, loan in pesos, pricing of export sales is based on pesos, and import Spanish learning material is invoiced and paid in USD.
1. What foreign exchange exposures do your company have? How does peso depreciation against USD affect your company’s foreign exchange exposures respectively?
2. By add import from Mexico, how do your company’s foreign exposures change? If your answer is yes, what are changes and how do that affect your future hedging strategies?
3. With the decline in the value of the peso (weak peso), how will it affect your company’s assets in Mexico, operation cost, loan payment, revenue, imports/exports sales, etc.? Assume Mexico peso depreciates more than peso-USD inflation differential due to political uncertainty during the election.
4. If you shift your invoicing policy to be only in dollars, how will your company’s peso exposures be affected?
5. In general, there is a lack of long-term currency futures and options on the Mexican pesos. A consultant suggests that this is no problem because you can hedge your position quarter by quarter. Thus, while the consultant recognizes that the peso could weaken substantially in the long-term, he sees no reason why you should worry about it as long as you continually create a short-term hedge position. Do you agree? Please note that Mexico central bank has kept the interest rate differential between Mexico and the U.S. stays about the same over time to avoid spillover effect from political events and risk.
6. From the peso-USD exchange rate forecast, it looks like peso would be declining for sometimes three or four years down the road. Your management team asks you to make a solid recommendation as how to manage each foreign exchange exposures respectively. Please list the hedging policy recommendations regarding each exposure. Since you offered good recommendations in the past, your boss hopes you can offer some advantages and disadvantages for each of short and long term strategies so that they can be better informed and then to make good decision.