Insight: You have a company in Mexico that needs to send its earnings back to th
ID: 2785606 • Letter: I
Question
Insight: You have a company in Mexico that needs to send its earnings back to the USA.
1) 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.?
2) 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.?
Explanation / Answer
a) Here the company has transaction of short-run exposure. The main buisness is based out of Mexico but it has exposure to a part of its receivables which is in USD. The variability in exchange rate between USD and Peso many cause some variabie. In light of financing cost equality, the forward rate of the peso ought to have an expansive rebate. In this way, supporting would not be helpful if the peso is relied upon to deteriorate marginally in light of the fact that the future spot rate would be esteemed higher than the predominant forward rate today.
b) Supporting with a currency showcase fence would include acquiring pesos and changing over the pesos into dollars. The getting rate of the peso would be significantly higher than the venture rate in dollars since Mexican financing costs are higher than U.S. loan fees. Supporting would not be advantageous. On the off chance that you don't support, the peso is relied upon to simply devalue somewhat. On the off chance that you fence, you need to acquire at a significantly higher rate than the rate earned on your currency showcase venture, so this cost to you makes the support unfortunate.