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Read Chapters 19, 20 & 21
Your business provides CDs on learning English that compliment the teaching that is provided by your employees based in Mexico. Assume that you decide to capitalize on these CDs by selling them to a large retail store based in Mexico. The CDs are not as effective without the teaching, but can be useful to individuals who want to learn the basics of the English language. You do not want to take the risk of sending a case of CDs to the retail store unless you can be sure of receiving payment. Explain how you can ensure payment for the CDs.
If you decide to implement a major marketing campaign in Mexico , you will incur high expenses in Mexican pesos. You would need to finance the cost of your marketing. You could either borrow dollars at a low interest rate and convert them to Mexican pesos to cover the cost, or borrow Mexican pesos to cover the cost. You would expect to pay off the loan on a monthly basis over the next year with the use of a portion of the revenue you generate from your business in Mexico.
a. Would your business be more exposed to exchange rate risk if you borrow dollars or Mexican pesos?
b. Explain how you would make the decision to borrow dollars versus Mexican pesos. What is the key factor (other than the interest rate of each currency) that will determine whether you should borrow dollars or Mexican pesos.
Assume that decide not to implement the marketing campaign that you considered in the previous chapter. You may pursue it next year instead and will attempt to invest some of your profits this year in money market investments, and then use this money to cover the campaign next year. You can retain your profits earned this year by investing them in a Mexican bank where interest rates are high. Alternatively, you could invest the profits in a dollar-denominated bank account. That is, you could convert your Mexican peso profits to dollars periodically and accumulate the dollars over the year. At the end of the year, you could convert the dollars back to Mexican pesos, so that you can pay for the marketing campaign. Explain how you could decide between these two alternatives.