Summary: Have a company which is located in the USA, but invested in a language school subsidiary in Mexico. Company also produces language learning CDs in the United States and exports them to Mexico to distributors and retail stores.

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.

Question: 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.