Hot Bargains, Inc. is a retailer based in the United States has a short-term supply chain problem with getting certain furniture products from Asia. Hot Bargains is considering a proposal from a furniture company based in Mexico that has short-term excess capacity. The Mexican company will let Hot
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Hot Bargains, Inc. is a retailer based in the United States has a short-term supply chain problem with getting certain furniture products from Asia. Hot Bargains is considering a proposal from a furni
Hot Bargains, Inc. is a retailer based in the United States has a short-term supply chain problem with getting certain furniture products from Asia. Hot Bargains is considering a proposal from a furniture company based in Mexico that has short-term excess capacity. The Mexican company will let Hot
Bargains use its factory for one year for a rent payment in pesos, and its start-up costs for converting the plant to its needs will also be in pesos. Hot Bargains anticipates that its other operating costs will be about half in pesos and half in dollars, and all of its revenues from selling the furniture will be in dollars. Hot Bargains considers financing this project using the following options:
A. All U.S. debt (loans) denominated in dollars provided by U.S. banks,
B. All debt (loans) denominated in peso provided by banks in Mexico, or
C. Half of the funds obtained from loans in peso, and half obtained from loans in dollars
(6 points) Which form of financing will be most appropriate for addressing Hot Bargains concerns about exposure to political risk (which is the risk of unfavorable government regulations)? Briefly explain why.
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Option C – Half of the funds obtained from loans in peso, and half obtained from loans in dollars – would likely be the most appropriate form of financing for addressing Hot Bargains’ concerns about exposure to political risk. This is because by diversifying the currency of the loans, Hot Bargains is spreading out its risk of potential unfavorable government regulations that could affect the value of one particular currency. For example, if the value of the peso were to decrease significantly due to political instability in Mexico, the impact on Hot Bargains’ financing would be mitigated by the presence of the dollar-denominated loans. On the other hand, if the company were to choose options A or B and have all of its financing in either dollars or pesos, it would be more vulnerable to the effects of political risk on the value of that particular currency.
