ECON

ECON

The 30 percent depreciation of the Mexican peso against the dollar could have negative impacts on the wholly owned subsidiary in Mexico in terms of imports and interest payments. To protect the wholly owned subsidiary from the depreciation, the CFO should take the following actions:

  • Set up a foreign currency account whereby the company will be accepting all payments in dollars to avoid paying more in converting the pesos to dollars. If the peso depreciates and the company needs to convert the pesos to dollars, transacting with dollars could be very expensive for the subsidiary.
  • Use a forward exchange contract whereby the subsidiary company buys dollars at a fixed exchange rate for an agreed time in the future. This will enable the company to accurately predict how many dollars to pay for imports and what dollars to expect from the sale of exports. 
  • The company could also consider currency option whereby the subsidiary enters into a contract to purchase dollars in specified amount by a specific date. This will help in hedging the company against depreciation of the peso and the company having to pay more for imports (J.P. Morgan, 2017).
  • Placing a market order whereby the subsidiary will buy and sell different investments immediately at the current market price before the depreciation takes effect. For instance, the subsidiary could consider selling its bonds and stocks in Mexico at the best available price to avoid using more pesos and getting fewer dollars for the returns on the investment. The subsidiary could also use this option to increase its inventory by placing a market order to avoid paying more for imports when the depreciation takes effect.

As a CFO, it will be necessary to consider all the options above to protect the company from the effects of the depreciation.

 

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