Question

3. XYZ Inc. a US based company expects to receive 10 million euros in each of the next 10 years. At the same time the company needs to obtain 2 million Mexican pesos in each of the next 10 years. The euro exchange rate is presently valued at $1.48 and is expected to depreciate by 3 percent each year over time. The peso is valued at $0.11 and is expected to depreciate by 2.5 percent each year over time. Do you think that the exchange rate movements will have a favorable or unfavorable effect on XYZ Inc. Justify your answer with appropriate example.

Answer 1

The exchange rate movements will have unfavourable impact on XYZ Inc.
The company is receiving Euros which will be sold to buy USD. As can be seen from the first table,
due to depreciation of the Euro, the company is receiving lesser amount in USD every year
This is because Euro is loosing 3% of its value against USD every year
For example, in the first year, for every 1 Euro the company received 1.48 dollars. While on the tenth year, the company received only
1.125 dollars against 1 Euro

The depreciation of pesos is having a favourable impact on the company.
Since the company has to obtain pesos, it will sell dollars and buy pesos
Due to depreciation of peso, they have to sell lesser dollars evey year to receive the same amount of pesos.
For example, in the first year, for 2 million pesos, XYZ had to sell 220,000 dollars
and in the tenth year, for 2 million pesos, XYZ had to sell only 175,172 dollars