Operating exposure (II) Tiny Tots Toys of Miami, Florida projects second quarter 2006 sales in Argentina to
Question:
Operating exposure (II) Tiny Tots Toys of Miami, Florida projects second quarter 2006 sales in Argentina to be 10,000 pesos, and expects the exchange rate to be \($0.5\) per peso (dollar earnings are therefore expected to be \($5,000).\)
a If the exchange rate unexpectedly changes to \($0.25\) per peso and Tiny Tots has not hedged, what are losses due to “operating exposure”?
b How could Tiny Tots eliminate its operating exposure?
c Suppose that Tiny Tots relocates production to Argentina and expects second quarter costs of production and distribution to be 5,000 pesos, leaving a net profit of 5,000 pesos if sales remain constant. Would you recommend that Tiny Tots hedge the entire 10,000 pesos?
d In either event, what will Tiny Tots’ hedging activity do to the expected profitability in US dollars and in Argentine pesos of Tiny Tots? Explain.
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