Your team is being asked on what decision to take on behalf of your employer (a multinational firm based in US). The firm has a wholly-owned subsidiary in Cuba in which it manufactures component parts for the assembly line of the US operations. One of the analysts of the company told you that the Cuban peso will depreciate by 25% against the dollar in the succeeding year. What actions, if any, should you take?
Additional information: the source of funding for the construction of the subsidiary in Cuba came from a long-term loan in a US Bank.
- In this case the multinational firm based in US has a wholly-owned subsidiary in Cuba
- Subsidiary in Cuba prepares the components and send to parent company in US
- Given the information that the Cuban peso will depreciate by 25% against the dollar in the succeeding year, exposes the subsidiary company to foreign exchange risk
- Parent company has been financed by the long term loan from US bank, that means its cost of funding is fixed
- As manager our advice to the company will be as follows:
o Subsidiary company will have the revenue receivable from Parent company
o Company should enter into a forward contract to sale the dollar in the forward market
o This will ensure that the company has hedged its exchange currency risk from the volatility in the forex market.
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