Question

As a U.S. company that has a subsidiary in Mexico that has been fully financed by a U.S. bank. If the Mexican peso were to depreciate by 40 percent compared to the U.S. dollar over the next year what actions would the U.S. Company need to take? Define your answer within the scope of the microeconomics course.

This question needs to be answered in respect to the"porduction possibilites curve" and or "comparative advantage" in microeconomics.

Answer 1

When depreciation occurs, the value of pesos will reduce with time due with wear and tear. Here the pesos will depreciate by 40% and hence all the assets purchased with pesos will have their value depreciated by 40%. The dollar value of Mexican subsidiary will also depreciate by 40%. So the entire loan can be payed off before the pesos depreciate. The company can also collect and retain the foreign receivables before the pesos gets depreciated. Also further peso denominated costs must be avoided. The value drop in peso accounts can be stopped in this way. Size of the finance has a major impact on the decision made.