Hedging Continual Exposure Clearlake, Inc., produces its products in its factory in Texas and exports most of the products to Mexico each month. The exports are denominated in pesos. Clearlake recognizes that hedging on a monthly basis does not really offer any protection against long-term movements in exchange rates. It also recognizes that it could eliminate its transaction exposure by denominating the exports in dollars, but that it still would have economic exposure (because Mexican consumers would reduce demand if the peso weakened). Clearlake does not know how many pesos it will receive in the future, so it would have difficulty even if a long-term hedging method were available. How can Clearlake realistically deal with this dilemma and reduce its exposure over the long term?

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 12, Problem 13QA
Textbook Problem

Hedging Continual Exposure Clearlake, Inc., produces its products in its factory in Texas and exports most of the products to Mexico each month. The exports are denominated in pesos. Clearlake recognizes that hedging on a monthly basis does not really offer any protection against long-term movements in exchange rates. It also recognizes that it could eliminate its transaction exposure by denominating the exports in dollars, but that it still would have economic exposure (because Mexican consumers would reduce demand if the peso weakened). Clearlake does not know how many pesos it will receive in the future, so it would have difficulty even if a long-term hedging method were available. How can Clearlake realistically deal with this dilemma and reduce its exposure over the long term?

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