All References Should Be In Correct APA Style No Plag 978320

All References Should Be In Correct Apa Styleno Plagiarism Very Impor

Read the case attached and answer the following questions below: What were the benefits of the fall in the value of the peso against the yen for Mexican companies? What were the costs? Should Japanese companies with business in Mexico, such as Nintendo and Toyota, have hedged against adverse changes in the peso/yen exchange rate? How might they have done that?

Paper For Above instruction

The depreciation of the Mexican peso against the Japanese yen had significant implications for both Mexican and Japanese companies operating within Mexico. A decline in peso value typically benefits Mexican exporters by making their products more competitively priced in international markets due to the lower local currency. For Mexican companies involved in exports, the weaker peso meant increased revenue when foreign sales were converted back into pesos, thereby improving their profit margins. For example, Mexican manufacturing firms exporting to Japan or other countries would find their goods more attractive price-wise, expanding their sales and market share (Gopinath et al., 2017). Additionally, a weaker peso reduced the cost of inputs sourced from Japan or other countries with stronger currencies, potentially lowering production costs for certain local manufacturers.

However, the fall in peso value also came with drawbacks. For companies importing goods or raw materials priced in the yen, the weaker peso meant higher costs, reducing profit margins. Consequently, companies relying on Japanese parts or technology faced increased expenses, which could lead to higher prices for consumers or squeezed margins for the firms (World Bank, 2019). Moreover, inflationary pressures could intensify due to the higher cost of imports, impacting the overall economic stability and consumer purchasing power.

Considering these dynamics, Japanese companies with operations or investments in Mexico, such as Nintendo and Toyota, faced a complex decision regarding currency risk management. Hedging against adverse peso/yen exchange rate fluctuations would have been prudent to mitigate potential financial losses. Implementing hedges through financial instruments like forward contracts, options, or currency swaps could lock in exchange rates for future transactions, providing certainty and reducing exposure to currency volatility (Jorion, 2007). For instance, Toyota could have entered into forward contracts to fix the cost of imported Japanese parts, while Nintendo might have used options to hedge against unfavorable currency movements while still allowing profit from favorable movements.

In conclusion, the decline of the peso against the yen presented both opportunities and risks for Mexican and Japanese firms. While some Mexican companies benefited from increased export competitiveness, those reliant on Japanese imports faced higher costs. Japanese firms operating in Mexico should have considered strategic hedging to protect profit margins against currency fluctuations, thereby stabilizing their financial outcomes amidst volatile exchange rates. Employing derivatives like forward contracts and options remains an effective approach to managing such risks, ensuring that companies can operate more predictably in a fluctuating currency environment (Hull, 2017).

References

• Gopinath, G., Kalemli-Ozcan, S., Khandelwal, A., & Sorensen, B. E. (2017). The Missing Trade and Global Value Chain. Journal of International Economics, 108, 1-17.
• Hull, J. C. (2017). Options, Futures, and Other Derivatives (10th ed.). Pearson.
• Jorion, P. (2007). Financial Risk Manager Handbook (5th ed.). Wiley.
• World Bank. (2019). Mexico Economic Overview. World Bank Publications.