You are the CFO of a U.S. 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? At least 250 Words.
Answer- Since the subsidiary has been located in Mexico, and once manufactured those component parts are get delivered to the U.S therefore the cost of production in Mexico should be less than that in U.S. However, the subsidiary in Mexico is financed by the bank borrowings in the U.S. Hence, it is important that the value of the U.S Dollars should be less with respect to the Mexican Peso. Since, Mexican Peso is expected to depreciate by 30 per cent against the U.S Dollars on the foreign exchange markets over the next year, therefore the value of Mexican Peso is expected to fall. Hence, the exports of Mexican products would rise. The firm should decrease its production activities in Mexico for the time being. It should decrease its investment in the subsidiary in terms of U.S dollars so that the demand for Dollars will fall which has become expensive in terms of Mexican Peso. In fact, the company should increase its manufacturing activities in U.S so that it would reduce the cost of production because of domestic production of the component parts. The firm should also go for rise in finance from Mexican banks so that it can become easy for the company to finance the wholly owned subsidiary. Investment in terms of Mexican Peso would lower down its cost of production and it would make it possible to increase the exports from Mexico to the U.S. once Mexican Peso would actually depreciate.
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