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 confronting hazard that cuban peso may devalue and it won't have the option to acknowledge $ by changing over peso as proposed,

To hege this hazard company can sell future/forward agreement on cuban peso. Thus company will have option to sell cuban peso at foreordain cost in future thus sparing itself from conceivable deterioration in Cuban cash

Alernatively company can purchase put alternative on cuban peso. Put choice offer right to it's purchaser to sell undrlying at determined cost in future. thus sparing itself from conceivable devaluation in Cuban money

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