Question

Let's assume that your company has operations in Mexico. It distributes Solar panels. What would happen to your revenues if the peso depreciates against the dollar? Conversely, what impact would an appreciation of the peso have on your revenues? Simply put, what are the foreign exchange risks that US companies encounter in their international operations? How should they mitigate them? In answering these questions and, to receive full credit, please view the Youtube and Khan Academy video on Foreign Exchange risks and reference a couple of them.

Answer 1

A depreciation in the value of the currency will make the exports the nation cheaper and thus increase exports and reduce imports and thus increasing net exports of the nation.On the other hand, as the currency of the nation appreciates in value, exports of the nation become expensive and imports become cheaper and thus net exports of the nation decline. Thus, a company having operations in Mexico will see an increase in its revenue if the peso depreciates against the dollar and a decrease in its revenue if the peso appreciates against the dollar.

In order to mitigate the risk, hedging of risk is undertaken. In this case, the value of the currency at which it will traded at the time of materialization of contract is fixed when the contract is finalized. Thus, hedging of foreign exchange risk helps in mitigating foreign currency risk.