Description
The Mexican ceramics folk-art firm signs a contract for the Mexican firm to deliver 1500 pieces of artwork to an Italian firm within the next 120 days. The contract is denominated in pesos. During this time the Mexican peso strengthens against the euro. What is the net profitability effect on the Mexican firm? What international market concept is demonstrated in this example? Discuss the risks associated with changing exchange rates and international commerce and provide a scenario demonstrating these risks.
Explanation & Answer
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Running Head: EXCHANGE RATE
1
Exchange rate
Name
Institution
EXCHANGE RATE
2
For the case where the Mexican Peso strengthens against the Euro, the Mexican firm will
experience a negative net profitability for its exports. This is because the Mexican firm will receive
fewer Euros than before, and hence it will experience a negative net profitability if it goes ahead
with the deal of delivering artworks to Italy amidst Mexican Pe...
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