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

Being a CFO of a US Firm whose wholly owned subsidiary in Mexico manufactures various component parts for assembly operations, these assembly operations take place in the country United States. This subsidiary has received from a bank in United States. According to view of analysts that Mexican peso could be depreciated by 30 percent against the dollar over the next year. Following are the actions I should take in such situations, these are as stated below:

• Due to depreciation of the currency value, there will be probability of having inflation in the local market, Import process will become much expensive and cost of production could become much cheaper and affordable. However, due to effect of inflation, consumer in the market of Mexico will lower their demand.
• If we can plan carefully before such depreciation, we could receive more value. We can export the component products to the country United States comparatively at low cost.