Are you a critical thinker ? What actions should you take?

Question

You are the CFO of a U.S. firm whose wholly owned subsidiary in Mexico manufactures component parts for your U.S. assembly operations. The subsidiary has been financed by bank borrowings in the United States. One of your analysts told you that the Mexican peso is expected to depreciate by 30 percent against the dollar on the foreign exchange markets over the next year. What actions, if any, should you take?

Answer 1

In effect, your US $ buying power will increase. Also, the value of your US debt relative to the peso will increase. This presents several opportunities:
- If you're in expense control mode, refinance the US debt at the new, lower amount (save on debt costs)
- if you're in a growth mode, refinance and seek out new additional financing with the extra 30% to invest more heavily in the company (keep the same debt costs but get more for it)
- buy futures contracts / arbitrage on the currency markets to mitigate your risk (e.g. what if the peso only goes down 10%? what if it goes down 50%?). You could possibly use some of the money you free'd up with the refinancing to fund these contracts.

Answer 2

I would sell my cow and buy a horse.