Mexican Peso Case Study Essay

4. Suppose Mexican inflation is projected at 3% instead of 7% per year (assume French

On April 1, 1991, Argentina’s Congress, with Domingo Cavallo as Minister of Economy, enacted the Convertibility Law (or Ley de Convertibilidad) legally adopting the currency board (Hornbeck, 2002). This legislation essentially pegged the Argentinean peso to the U.S. dollar. The government guaranteed the convertibility of the peso to U.S. dollar at a one-to-one exchange rate, limiting the printing of pesos to only those necessary to purchase dollars in the foreign exchange market. Thus, the central bank was required by law to hold foreign reserves to cover its peso liabilities (Hanke and Schuler, 2002). With this fixed exchange rate, the Argentinean government was hoping to preserve the value of their currency and stabilize inflation. The peg was initially successful, as it cured hyperinflation that occurred at the end of the 1980s and provided price stability needed for economic growth in the early 1990s. However, by the late 1990s,

a) A fall in the value of the Australian dollar (AUD) against the U.S. dollar (USD) benefit Billabong in two folds, strengthened price competitiveness and translation advantage. Firstly, the Americas segment accounts for about 50% of Billabong’s sales revenue in 2008 and 2009. (Appx.1) In case of depreciation of AUD against USD, the price of imported surfwear to the U.S. in terms of USD will decrease. The US importers demand more for Billabong’s products. The sales increases from the strengthened price competitiveness. Secondly, when Billabong received payment from the importers, it will translated back into AUD for use in Australia. As AUD depreciate, the receipt in USD can be translated into more AUD than before, bringing

Rate = Canadian rate Mexican pesos? Japanese Yen ? French Francs ?

26. A financial manager has detrermined that the appropriate rate discount for a foreign project is 17 percent. However, that discount rate applies in the United States using dollars. What discount rate should be used in the foreign country using the foreign currency? The inflation rate in the United States and in the foreign country is expected to be 3 percent and 8 percent, respectively.

b. Explain what impact the change in the value of the dollar between 2008 and 2009 will have on the United States current account.

 The BOP accounts also show the sources of demand and supply of a country’s

According to the Washington Post, Mexico's economy has totally declined. The values of their peso have decreased radically against the U.S. dollar, growth rate has

On the other hand, the peso devaluation will not have that much of a positive effect on Farmington (Antilles) N.V. as the peso depreciates relative to the USD. The result is the subsidiary being negatively impacted as the USD/peso exchange rate is rising, as they convert revenue earned in pesos to USD to deposit into U.S. bank accounts. This facility had almost 4 million MXN receivables at the end of the year. The 1994 average exchange rate is 3.5 MXN/USD, where these 4 million MXNs would equate to approximately 1.14 million USD. When the exchange rate values the devalued peso at 5.0 MXN/USD, these 4 million MXNs are only equal to 0.80 million USDs, showing a loss of more than 300,000 USDs. When the exchange rate changes from 4.0 to 5.0 MXN/USD, we can see the loss the company would experience, and thus the negative impact on this facility.

i) Given that Dozier industries does nothing to hedge this risk, assuming that spot exchange rate remains the same as on Jan 14,1986 levels,

The black market rate of Rp 50.00/U.S.$ represented a devaluation from the current rate of Rp40.4795/$ of about 23.5%.

c. Exchange rate risks: significant portion of revenue stream born currency exchange risk (peso vs. USD) regardless of geographical and product diversification. These risks were absolutely external and thus could have been hardly mitigated.

Another important factor that affected the financial sector and would eventually contribute to the development of the Mexican Peso Crisis was that the risk premium of the Mexican economy was significantly impacted by the armed conflicts that happened in Chiapas at that time. This armed conflict led to a decline in investor confidence about business in Mexico, such that there was a decline in the investment potential of the region (Mathur, 18).

In this mini-case we will look into 4 key aspects such as Mexico’s key economic indicators, the causes of the country’s balance of payment problems, policies in

Based on your answer to question 2, how would Mesa’s cash flows be affected by the expected exchange rate movements? Explain.