Question

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.

Answer 1

Here the US company is facing risk that cuban peso might depreciate and it will not be able to realize $ by converting peso as intended,

To hege this risk company can sell future/forward contract on cuban peso. Thus company will have right to sell cuban peso at predetermine price in future thus saving itself from possible depreciation in Cuban currency

Alernatively company can buy put option on cuban peso. Put option give right to it's buyer to sell undrlying at specified price in future. thus saving itself from possible depreciation in Cuban currency