Suppose that you are a manager for a large multinational financing company that

Question

Suppose that you are a manager for a large multinational financing company that provides financing for overseas capital project for both U.S. and foreign firms. Your firm has received a finnancing request from aMexican corporation for funds to finance a new capital project. What makes this financing agreement unique is that the Mexican corporation does not want the financing immediately , but in rather wishes to recieve it in 90 days.

A. If your firm agrees to provide the financing onlyif the Mexican corporation agrees to accept the financing in U.S. Dollars rather thanin Mexican pesos would your to change to why or why?

Suppose that since the Mexican corporation wants the financing to build a plant in Spain, it needs the financing to be ineuros as Spainis a member of the Eurozone. In that case do your answer to A above? Why or Why not?

Explanation / Answer

A. No, i will n't change the firm decision to provide the financing onlyif the Mexican corporation agrees to accept the financing in U.S. Dollars rather thanin Mexican pesos, Because in case of providing the loan in terms of pesos, there will be rise of exchange rate variation, as the firm will lose in the case of exchange rate appreciation.

No , the answer will n't change even in this case, because even in this case there is risk of exchange rare variation as the funds are required in euros. As in 90 days if exchange rate changes ,i.e if it appreciates then the company has to pay more in dollar terms for loan wich would be above the approved loan amount in dollars.

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