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Chapter 10

Q. 10.ST.3

Assume your U.S. firm currently exports to Mexico on a monthly basis. The goods are priced in pesos. Once material is received from a source, it is quickly used to produce the product in the United States, and then the product is exported. Currently, you have no other exposure to exchange rate risk. You have a choice of purchasing the material from Canada (denominated in C$), from Mexico (denominated in pesos), or from within the United States (denominated in U.S. dollars). The quality and your expected cost are similar across the three sources. Which source is preferable, given that you prefer minimal exchange rate risk?

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The Mexican source would be preferable because the firm could use peso inflows to make payments for material that is imported.