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Chapter 10

Q. 10.ST.4

Using the information in the previous question, consider a proposal to price the exports to Mexico in dollars and to use the U.S. source for material. Would this proposal eliminate the exchange rate risk?

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Verified Solution

No. If exports are priced in dollars, the dollar cash flows received from exporting will depend on Mexico’s demand, which will be influenced by the peso’s value. If the peso depreciates, Mexican demand for the exports would likely decrease.