The Mexican ceramics folk-art firm signs a contract for the Mexican firm to deliver 1500 pieces

The Mexican ceramics folk-art firm signs a contract for the Mexican firm to deliver 1500 pieces of artwork to an Italian firm within the next 120 days. The contract is denominated in pesos. During this time the Mexican peso strengthens against the euro. What is the net profitability effect on the Mexican firm? What international market concept is demonstrated in this example? Discuss the risks associated with changing exchange rates and international commerce and provide a scenario demonstrating these risks.

By the due date assigned respond to the discussion question assigned by the faculty. Submit your response to the Discussion Area. Use the same Discussion Area to comment on your classmates’ submissions and continue the discussion through the end of the module. Comment on how your classmates would address differing views.

Discussion Grading Table
Maximum Points
Quality of initial posting, including fulfillment of assignment instructions
16
Quality of responses to classmates
12
Frequency of responses to classmates
4
Reference to supporting readings and other materials
4
Language and grammar
4
Total:
40

The Mexican ceramics folk-art firm signs a contract for the Mexican firm to deliver 1500 pieces of artwork to an Italian firm within the next 120 days.

Assignment 1: Discussion Question

Net Profitability Effect On the Mexican Firm

Changes in exchange rates of any currency have a great effect on company’s profitability factor especially if the company is internationally exposed. The risk of exchange rate can be defined as a risk that may affect the investment of investors as a result of changes in the exchange rate. If the peso strengthens against the euro as it has been stipulated, the Mexican will definitely experience profits. In the reverse, if the peso loses strength, the Mexican firm will experience losses in case it completes the deal with the Italian firm. Furthermore, strengthening of the peso increases the buying capacity of the euro (Arndt, 2013). Since the Mexican firm exports artwork, it will eventually receive fewer euros and hence will have a loss in its finance.

International Market Concept Demonstrated

The market concept being tested is currency hedging. The given example tests the possibility and advantage of applying currency hedging as a way of reducing the effect of foreign exchange fluctuations on possible profits being made. The concept of hedging is being used by the countries as a way of eliminating their foreign exchange risks (Vámos & Novák, 2015).

Risks Associated with Changing Exchange Rates and International Commerce Exchange rates have an effect on sales and revenues of a given company. This is as a result of fluctuation of currency values of foreign exchange (Walter, 2013). An appreciation of a domestic currency against a foreign currency results in reduction on returns earned. A good example is a US car compan………….