Question

Blanca (a U.S. firm) has no subsidiaries and presently has sales to Mexican customers amounting to MXP98 million, while its peso‑denomin­ated expenses amount to MXP61 million. If it shifts its material orders from its Mexican suppliers to U.S. suppliers, it could reduce peso‑denominated expenses by MXP19 million and increase dollar‑denominated expenses by $1,800,000. This strategy would _______ the Blanca’s exposure to changes in the peso’s movements against the U.S. dollar. Regardless of whether the firm shifts expenses, it is likely to perform better when the peso is valued _______ relative to the dollar.

	reduce; high
	reduce; low
	increase; low
	increase; high

Answer 1

Current Exchange Rate - 1 USD=MXP19.37

The answer is = Increase, High

The same is explained below:

The company’s current MXP denominated trade is as follows:

                                                                                MXP

Sales/receivable               A                             98 Million

Expenses/Payables         B                             61 Million

Net Receivable                 (A-B)                     37 Million

It is clear from the above table that company has net receivable after adjusting the payments in MXP. In case it reduces its MXP payment and shift it to US denominated in USD, then the exposure of the company in MXP would be as follows:

                                                                                MXP

Sales/receivable               A                             98 Million

Expenses/Payables         B                             42 Million

Net Receivable                 (A-B)                     56 Million

As can be seen from the above that company’s exposure in MXP has increased by 19 million which it was earlier offsetting with the expenses.

Further, company is net receiving the MXP which it is converting in to USD at the current rate. The company will benefit in case the MXP is valued high against the USD in both the cases.

Example in this regard is as follows (considering the original position)

                                                                                                Current                Expected HIGH    Expected Low

Rate (MXP per USD) 19.37                        18.00                      21.00

Net receivable 37 Million                37 Million              37 Million        

MXP Converted to USD                                                           1.91 Million           2.05 Million         1.7619 Million

It can be seen that company will benefit if Peso get valued Higher against USD.