Mexichem, a Mexican company specializing in certain piping, vinyl, and other chemical products, exports 70% of its $5.7 billion in annual sales: 30% to the U.S. and 20% each to Japan and Europe. Assume it incurs all its costs in Mexican pesos, while most of its export sales are priced in the local currency.
a. How is Mexichem affected by exchange rate changes? Be specific about what exchange rate changes would have positive or negative effects.
b. Describe Mexichem’s transaction exposure and differentiate it from its operating exposure.
c. How would Mexichem protect itself against transaction exposure?
d. What financial, marketing, and production techniques would Mexichem use to protect itself against operating exposure?
e. Can Mexichem eliminate its operating exposure by hedging its position every time it makes a foreign sale or by pricing all foreign sales in pesos? Why or why not?