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Depreciation is a reduction in the value of an asset with the passage of
time, due in particular to wear and tear. When its predicted
that peso would depreciate by 30 percent, it would mean that all the
assets purchased in peso depreciate by 30 percent in their value respectively.
If the peso depreciates by 30 percent as expected, the dollar value of the Mexican subsidiary would decrease too. With the depreciation of peso, the demand for peso would increase and more consumers would start buying goods in peso because the same amount of money paid to buy a good carries a lesser value. In contrast, the demand for goods in U.S dollar would decrease. This would result in the decreasing value of the company’s Mexican subsidiary in U.S dollars.
With the expected depreciation in mind, the company would want to protect the company by collecting the foreign receivables before the depreciation takes place, so that it would not lose its value. Furthermore, by avoiding major peso-denominated costs until after devaluation, would likely cut down costs for the company. In contrast, U.S dollar-denominated purchases should be made before the devaluation and change peso-denominated major accounts into dollars if it is possible. By doing this, it prevents the drop in values of peso accounts.
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