Assume that your U.S. firm currently exports products to Mexico on a monthly basis. The goods are priced in pesos. Once material is received from a source, it is quickly used to produce the product in the United States, and then the product is exported. Currently, your firm has no other exposure to exchange rate risk. You have a choice of purchasing the material from Canada (denominated in C$), from Mexico (denominated in pesos), or from within the United States (denominated in U.S. dollars). The quality and expected cost are similar across the three sources. Which source is preferable, given that you prefer minimal exchange rate risk?

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 3ST
Textbook Problem

Assume that your U.S. firm currently exports products to Mexico on a monthly basis. The goods are priced in pesos. Once material is received from a source, it is quickly used to produce the product in the United States, and then the product is exported. Currently, your firm has no other exposure to exchange rate risk. You have a choice of purchasing the material from Canada (denominated in C$), from Mexico (denominated in pesos), or from within the United States (denominated in U.S. dollars). The quality and expected cost are similar across the three sources. Which source is preferable, given that you prefer minimal exchange rate risk?

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