Scenario: American Corporation purchased mechanical parts from a Mexican manufacturer. American Corp. will have to pay 200 million Mexican Pesos for the goods today.

Checklist: Solve the problem

• If the spot rate today is MP10/$. What is the dollar cost of American, Corp.s payable?
• If the spot rate changed to MP9/$ how would that effect on the cost of the mechanical parts.
• If the intent for American Corp. is to immediately resell these parts for $25 million what is the impact of the exchange rate on profitability?
• Show your initial calculations based upon the initial spot rate versus the changed spot rate.
• Show the calculations regarding the sale price (USD) and the impact of the exchange rate on profitability and explain why.
• Explain strategies that could be employed to minimize exchange rate risk.