With the expected depreciation of the peso by 30% over the next year, the cost of doing business in Mexico is set to rise. The depreciation of the Mexican peso implies that its exchange value to the US dollars will reduce by 30%. With our business being a multinational, its operations stands to face different risks associated to foreign exchange. This risks include; transactional, translational and economic risks. It will result to increased operational costs especially those associated with loan repayment to the US banks as the business is set to face a all the above risks (Antoci 6-7). As the CFO, there is a need to take different measures to ensure that the subsidiary's business operations are not negatively impacted by the expected increase in operational costs.
Discussion
We will utilize the hedging strategy by setting up a foreign currency account. The dollar currency account will be relied upon to pay up for business transactions. As Serena and Ricardo (2017) observes a foreign currency account is crucial in ensuring that the transactional and economic risks that a business is set to face as a result of the fluctuating foreign exchange is abated. The account will hence not be useful in shielding the company against the depreciation of the peso.
We will also explore invoicing strategies whereby we will denominate the receivables and payables in US currency. This will ensure that the business is shielded from the local currency risk hence not directly being impacted by the depreciation of the local currency (Antoci 15).
Conclusion
The above strategies will ensure that the business performance of the subsidiary together with its parent company is not negatively impacted. This will guarantee that the Mexican subsidiary is able to meet its initial goals.
Works cited
Antoci, Vitalie. "Managing transaction exposure in MNCs." (2015). https://www.theseus.fi/bitstream/handle/10024/104281/Vitalie%20Antoci%20-%20Transaction%20Exposure.pdf?sequence=1. Accessed 20th August 20, 2018.
Serena, José María, and Ricardo Sousa. "Does exchange rate depreciation have contractionary effects on firm-level investment?" (2017).
