FOR PROFESSIONAL RESEARCH WRITER

Consider the following business that you could easily create: a business that teaches individuals in a non-U.S. country to speak English. While this business is very basic, it still requires the same type of decisions faced by large MNCs. Assume that you initially establish this business in Mexico.  

Details of Your Business. You live in the U.S. You invested $60,000 to establish a business of a language school called EI (Escuela de Ingles) in Mexico City, Mexico. You hire local individuals in Mexico who can speak English and train others how to speak English. You have a small subsidiary in Mexico, which has an office and an attached classroom that you lease. Clients can come to your subsidiary for a 1-month structured course in English, taught by your employees. You advertise in the local newspapers to promote the teaching services offered by your business.  

You also serve some individuals from Mexico who have taken English classes and want to come to the U.S. for a one-week intense course in which they can improve and practice their English and practice it. 

All revenue and expenses associated with your business are denominated in Mexican pesos. Most of the profits from the business in Mexico are sent to you by your subsidiary at the end of each month. While your expenses are somewhat stable, your revenue varies with the number of clients who sign up for the English-speaking courses in Mexico.  

You only need to know this background so that you can answer the related questions that are asked about your business. Answer each question as if you were serving on the board of your business or as a manager of the business.

Question 1

Given the factors that affect the value of a foreign currency, describe the type of economic or other conditions in Mexico that could cause the Mexican peso to weaken, and therefore to adversely affect your business. 

Question 2

Explain how currency futures could be used to hedge your business in Mexico. Explain how currency options could be used to hedge your business in Mexico. 

Question 3

a. Explain how your business would likely be affected (at least in the short run) if the central bank of Mexico intervened in the foreign exchange market by exchanging Mexican pesos for dollars in the foreign exchange market. 

b. Explain how your business would likely be affected if the central bank of Mexico used indirect intervention by lowering Mexican interest rates (assume inflationary expectations have not changed).