2. What is meant by “loss to lease”? Explain.
January 12, 2018
b. Using the forward market hedge, what is an appropriate forward exchange rate for the euro?
January 12, 2018

. Which source is preferable, given that you prefer minimal exchange rate risk?

Assume your U.S. firm currently exports to Mexico on a monthly basis. The goods are priced in pesos. Once raw materials are received from a source, they are quickly used to produce the product in the United States and then the product is exported to Mexico. Currently, you have no other exposure to exchange rate risk. You have a choice of purchasing the raw materials from Canada (denominated in C$), from Mexico (denominated in pesos), or from within the United States (denominated in U.S. dollars). The quality and your expected cost are similar across the three sources. Which source is preferable, given that you prefer minimal exchange rate risk? Using the information in the previous question, consider a proposal to price the exports to Mexico in U.S. dollars and use the U. S. source for raw materials. Would this proposal eliminate the exchange rate risk? Why or why not?

 

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