When the Mexican Peso depreciates by 30% against the dollar, it shows that Mexico is facing inflation. Inflation has negative implications on the cost of doing business. For example, the prices of raw materials will rise as taxes and other government levies also increase (Nakatani 62). Therefore, as a chief financial officer (CFO) I must put in place measures in preparation for the depreciated Mexican currency.
One key measure to take is selling some shares of the wholly owned subsidiary in Mexico. If at most 30% of the subsidiary firm’s shares will be sold, the parent company gets the privilege of spreading its risks during the inflation period. Additionally, this move will help in raising extra funds that will be needed to make preparations for the tough coming year (Beckmann and Stix 7). Therefore, as the CFO I will advise the board to sell some shares of the subsidiary firm.
The second action to be taken should be making advanced repayments of the bank loans from the United States. A depreciated Mexican Peso would mean the subsidiary firm would use more Mexican currency to pay off the loans from the U.S. Therefore, to prevent the company from spending extra on loan repayments, it is wise to make advanced installments of more than 12 months hoping the currency will have stabilized after the one year.
The third step will be making advanced extra purchases and importations of the parts manufactured by the subsidiary firm in Mexico. Such an action will help the holding company avoid paying extra when doing business with its subsidiary in the coming year when Mexican Peso will have depreciated. Note, the exportation charges that the subsidiary company will incur in the following year are likely to be high due to inflation.
Works Cited
Beckmann, Elisabeth, and Helmut Stix. "Foreign currency borrowing and knowledge about exchange rate risk." Journal of Economic Behavior " Organization, vol. 112, 2015, pp. 1-16.
Nakatani, Ryota. "Real and financial shocks, exchange rate regimes and the probability of a currency crisis." Journal of Policy Modeling, vol. 40, no. 1, 2018, pp. 60-73.
