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Foreign Exchange Rate Risk

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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.

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Step 1
The net profitability effect on the Mexican firm is the difference between the number of euro the 1500 pieces of artwork cost at the time of signing the contract and when the payment was made for the artwork. Since the Mexican peso has strengthened, the net profitability is positive. The Italian firm has to pay more Euros to buy ...

Solution Summary

This posting gives you a step-by-step explanation of profit and risks from foreign exchange fluctuations. The response also contains the sources used.

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