Exposure to Pegged Currency System Assume that the Mexican peso and the Brazilian currency (the real) have depreciated against the U.S. dollar recently due to the high inflation rates in those countries. Assume that inflation in these two countries is expected to continue and that it will have a major effect on these currencies if they are still allowed to float. Also assume that the government of Brazil decides to peg its currency to the dollar and will definitely maintain the peg for the next year. Milez Co., a Mexico-based MNC, exports supplies from Mexico to Brazil. It invoices its supplies in Mexican pesos. Its main competition is from firms in Brazil that produce similar supplies and sell them locally. How will the sales volume of Milez be affected (if at all) by the Brazilian government’s actions? Explain.

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 10, Problem 29QA
Textbook Problem

Exposure to Pegged Currency System Assume that the Mexican peso and the Brazilian currency (the real) have depreciated against the U.S. dollar recently due to the high inflation rates in those countries. Assume that inflation in these two countries is expected to continue and that it will have a major effect on these currencies if they are still allowed to float. Also assume that the government of Brazil decides to peg its currency to the dollar and will definitely maintain the peg for the next year. Milez Co., a Mexico-based MNC, exports supplies from Mexico to Brazil. It invoices its supplies in Mexican pesos. Its main competition is from firms in Brazil that produce similar supplies and sell them locally. How will the sales volume of Milez be affected (if at all) by the Brazilian government’s actions? Explain.

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