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International expansion-business - Essay Example

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The purpose of this paper is to prepare an analysis as to the short term and long term prospects of the currency of Mexico (The Peso) relative to the American dollar. The format that this paper will utilize is to first highlight what the risks of currency fluctuations would have…
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International expansion-business
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International expansion-business

Download file to see previous pages... In the case of transaction it is the case that if Natural Detergent inc, were to engage in a contract with a Mexican supplier than the company runs the risk that arises out of a time delay from the moment they sign the contract and the moment they execute the contract. In this regard if the Mexican peso were to rapidly appreciate against the American dollar than it would theoretically cost more money to settle the contract. In regards to a translation risk this is the risk associated with Natural Detergents inc. keeping some measure of wealth (Property, plant, equipment, cash reserves etc.) and if the value of this measure dominated by a foreign currency that was to rapidly appreciate against the American dollar than Natural Detergent inc. would recognize a loss. One could conclude that before any expansion project were to move forward than a firm understanding of the Mexican peso and its historical exchange rate to the American dollar would be of utmost importance to potential investors.
Historically speaking, Mexico has had a lot of commercial ties with the United States and the economy of Mexico was strongly affected by the strength (Or weakness) of the American economy. For these reasons according to Iowa State University Department of Economics (2010) Mexico had indeed pegged the Peso to the United States Dollar. What this translates to is that the country had determined what the exchange rate ought to be (typically between 9 and 13 peso’s per dollar) and this became the official exchange rate. During these times there was effectively very little risk to engaging in commerce with Mexico because the exchange rate was always known, and any changes that would be made to the exchange rate would not typically be too drastic. However it is the case that the inflation rates of the two countries varied vastly and as such the decision to ‘float the currency’ was made. This sets the stage for how the peso now ...Download file to see next pagesRead More
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