Case: Teaching English as 2nd language (ESL) in Mexico

BACKGROUND

One of the best methods of learning broad concepts in this text is to put yourself in the place of an MNC manager and apply the concepts to make financial decisions. As a young financial manager, your company sent you to Quinnipiac to learn international financial management and your boss asks you to communicate with other departments like marketing, finance, accounting and board members about international financial management issues that influence companys policies and strategies on this topic.

Details of Your Business. Your company locates in the U.S. and started by your boss, John, a self-taught and very intelligent entrepreneur. This is the sixth business he has had but it is the first business he started in a foreign country. Your company invested $60,000 to establish a business of a language school called EE (Escuela de Engles) in Mexico City, Mexico. Your company hired local individuals in Mexico who can speak English and train others how to speak English. Your company has a small subsidiary in Mexico, which has an office and an attached classroom that your company leased. Clients can come to your subsidiary for a 1-month structured course in English, taught by your employees. The marketing manager advertised in the local newspapers to promote the teaching services offered by your business.

You also serve some individuals from Mexico who have taken English classes and want to come to the U.S. for a one-week intense course in which they can improve and practice their English and practice it. All revenue and expenses associated with your business are denominated in Mexican pesos. Most of the profits from the business in Mexico are sent to you by your subsidiary at the end of each month. While your expenses are somewhat stable, your revenue varies with the number of clients who sign up for the English-speaking courses in Mexico.

Your business provides learning materials with CDs for free to customers who pay for the English courses that you offer in Mexico. You consider the idea of mass production of the learning materials with CDs in the U.S., so that you can sell (export) them to distributors or to retail stores throughout Mexico. You would price the learning package based on dollars when exporting them. The learning package is not as effective without the teaching, but can be useful to individuals who want to learn the basics of the English language.

Throughout of this semester, as your knowledge on this topic increases you will assess the firms opportunities and exposures and to offer your input on potential strategies that your business may pursue.

Chapter 4, 6, 7 case

Under floating exchange rate regime, recently peso has been weaken rapidly and affects your companys export teaching materials (e.g. CDs) revenue and repatriation of peso earnings from the operation in Mexico, your boss ask you to identify factors that might have caused Mexican peso to weaken and to assess the impacts to your business. Meanwhile from reading an article on Wall Street Journal and similar news on Financial Times, the media seems indicate that Mexican Central Bank may intervene in the foreign exchange market to stop peso declining against USD and stop capital flying out of the country.

What could these factors be that contribute to peso depreciations?

What alternatives central bank may have to intervene the foreign exchange market? What are advantages and disadvantages of each intervention approach? Which method is the most effective to effect exchange rate, interest rate and inflation among these measures and why?

Explain how your business would likely be affected (at least in the short run) if the central bank of Mexico intervened in the foreign exchange market successfully. Note: You need to be specific about transactions and explain positive or negative impacts here.

Looking at historical data, you identified a trend that Mexican nominal interest rates have been substantially higher than U.S. nominal interest rates in recent years. Do you think your company should remit profits to the U.S. or alternatively to keep these profits in a Mexican bank to capture higher interest rate in Mexico?

(You may want to rethink your answer after you complete questions 5 below)

You company plans to repatriate 8 million peso per quarter to the US. The 3 mon. interest rate is 2% in Mexico and the interest rate in the US is 0.5%. The current exchange rate is $0.054 per peso and three month forward rate is $0.05. Your boss, John, would like to put the peso earnings of this quarter in Mexico and not remit back to the US because of the higher peso interest rate than USD interest rate. Your plan is to repatriate the money and convert peso to USD right away. Please calculate the cash inflow of Johns plan and your plan respectively and then discuss with John to see which one is a better one.