Question

International Marketing Incident A: Argentina Currency Devaluation A long simmering conflict between Argentina and the United Kingdom over sovereignty of the Falkland Islands has begun to escalate. The UK has announced its intention to begin oil exploration on the island. The Argentine government has protested the UK's right to do so. The conflict has reignited tensions going back to the 1982 war between the two countries over the Falkland Islands. Because of the escalating tension, many investors are moving their money out of Argentine Pesos and into more stable currencies. This capital flight has caused the Argentine Peso to drop on foreign exchange markets. Your group is currently operating in Argentina. AllStar management is concerned to what extent the Argentine Peso will be devalued. They want to examine two scenarios where the currency drops 15% and 25%. Currently the exchange rate is 4.2974 Pesos to Dollars (see Exhibit 1). How would the devaluation of the Argentine Peso affect your contribution in the home currency ($)? How much more sales revenue would be needed in Argentina to maintain your current contribution? Contribution after Marketing in Argentina for the period was 21% of sales (see Exhibit 2). Your goal is to maintain this percentage.

How can companies predict or forecast the likelihood of country stability or instability?

Answer 1

Given current exchange rate of 4.2974 pesos to dollars.

A) If pesos depreciate by 15% the exchange rate would be 4.94201 pesos to dollars.(4.2974*115%)

B) If pesos depreciate by 25% the exchange rate would be 5.37175 pesos to dollars.(4.2974*125%)

Currently the contribution in home currency is $16.12603 ( =69.3/4.2974).

Rate per sales unit is ARS 7.0848 (=325.9/46)

To maintain the current contribution at 15% & 25% depreciation sales to be calculated on reverse basis as tabulated below.

					Amount in ARS
S.NO	Particulars	Current status	15% depreciation of ARS	25% depreciation of ARS	%
A	Contribution	69.3	79.70 (=16.12603*4.94202)	86.63 (=16.12603*5.37175)	21%
B	Total Marketing	73.30	87.29	94.88	23%
C	Gross Margin (A+B)	142.60	166.98	181.50	44%
D	Costs	183.30	213.45	232.01	56%
E	Manufacturer sales	325.90	380.43	413.51	100%
F	Price per unit sold in	7.08	7.08	7.08
G	No. of Units to be sold (E/F)	46.00	54	58

The entity would need Addition sales revenue of ARS 54.53 (380.43-325.90) in case of 15% depreciation in ARS and ARS 87.61 (413.51-325.90) in case of 25% depreciation in ARS to maintain the current contribution.

Company could forecast the likelyhood of country's stability or instability based on the market news regarding the status of conflict between argentina and U.K. Company could itself hedge the position to keep safe from the currency fluctuations . Hedging options could be through option market or futures market ( derivatives).