Assignment 1 Discussion Question: Mexican Ceramics Folk Art

Assignment 1 Discussion Questionthe Mexican Ceramics Folk Art Firm Si

Assignment 1: Discussion Question The Mexican ceramics folk-art firm signs a contract for the Mexican firm to deliver 1500 pieces of artwork to an Italian firm within the next 120 days. The contract is denominated in pesos. During this time the Mexican peso strengthens against the euro. What is the net profitability effect on the Mexican firm? What international market concept is demonstrated in this example?

Discuss the risks associated with changing exchange rates and international commerce and provide a scenario demonstrating these risks. By the due date assigned respond to the discussion question assigned by the faculty. Submit your response to the Discussion Area. Use the same Discussion Area to comment on your classmates' submissions and continue the discussion through the end of the module. Comment on how your classmates would address differing views.

Paper For Above instruction

The scenario presented offers a valuable lens through which to examine the impact of exchange rate fluctuations on international business transactions. When a Mexican ceramics firm enters into a contract to deliver goods denominated in pesos but destined for an Italian company, the exchange rate between the peso and the euro becomes a critical factor influencing profitability. Specifically, with the Mexican peso strengthening against the euro, the firm's costs in foreign currency terms decrease, resulting in a net positive effect on profitability.

In this particular case, since the contract is denominated in pesos and the peso appreciates relative to the euro, the Mexican firm benefits financially. This is because the firm's revenue in pesos remains fixed, but the cost of converting pesos to euros for transaction settlement diminishes. Consequently, the firm effectively gains from the favorable exchange rate movement, as it can acquire euros at a lower cost if it needs to import materials or cover expenses in euros. The net profitability effect is thus positive, as the firm's costs expressed in pesos decrease relative to its revenue, increasing its profit margin.

The international market concept exemplified here is exchange rate risk, also known as foreign exchange risk. This risk arises from fluctuations in currency prices, which can either mitigate or exacerbate profits depending on currency movements and the company's operational exposure. The appreciation of the peso against the euro signifies a favorable shift for the Mexican firm involved in this transaction, illustrating how exchange rate dynamics directly influence international commerce outcomes.

However, exchange rate risks are inherently volatile and can work against firms, especially if currencies move unfavorably. For example, if the peso had weakened instead of strengthened during the contract period, the Mexican firm would have faced increased costs when converting pesos to euros, diminishing profitability or even leading to losses. Such unpredictability underscores the importance of managing foreign exchange risk by employing hedging strategies, such as forward contracts, options, or currency swaps.

Moreover, other risks associated with international commerce extend beyond exchange rate fluctuations. Political instability, changes in tariffs or trade policies, and economic downturns in either the exporting or importing countries can all pose threats to smooth international business operations. For instance, a sudden increase in tariffs or imposition of trade restrictions could raise costs or block shipments, interrupting supply chains and affecting profitability.

A practical scenario demonstrating these risks could involve a Mexican manufacturer entering into a contract to supply electronics to a European retailer. If the Mexican peso depreciates sharply against the euro before the shipment, the seller experiences reduced profits due to decreased peso value. Conversely, if the peso appreciates, the buyer might face higher costs, potentially straining the business relationship. Unexpected political instability or regulatory changes—such as tariffs or sanctions—could further exacerbate these risks, leading to financial losses or contractual disputes.

Therefore, effective management of exchange rate risks and other international trade uncertainties requires comprehensive strategies that include currency hedging, diversified markets, and flexible contractual terms. Companies must analyze their exposure and implement measures to safeguard profits against the unpredictable nature of global markets.

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