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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

Your business provides CDs on learning English that compliment the teaching that is provided by your employees based in Mexico. Assume that you decide to capitalize on these CDs by selling them to a large retail store based in Mexico. The CDs are not as effective without the teaching, but can be useful to individuals who want to learn the basics of the English language. You do not want to take the risk of sending a case of CDs to the retail store unless you can be sure of receiving payment. Explain how you can ensure payment for the CDs. 

Question 2

If you decide to implement a major marketing campaign in Mexico , you will incur high expenses in Mexican pesos. You would need to finance the cost of your marketing. You could either borrow dollars at a low interest rate and convert them to Mexican pesos to cover the cost, or borrow Mexican pesos to cover the cost. You would expect to pay off the loan on a monthly basis over the next year with the use of a portion of the revenue you generate from your business in Mexico. 

a.    Would your business be more exposed to exchange rate risk if you borrow dollars or Mexican pesos?

b.    Explain how you would make the decision to borrow dollars versus Mexican pesos. What is the key factor (other than the interest rate of each currency) that will determine whether you should borrow dollars or Mexican pesos. 

Question 3

Assume that decide not to implement the marketing campaign that you considered in the previous chapter. You may pursue it next year instead and will attempt to invest some of your profits this year in money market investments, and then use this money to cover the campaign next year. You can retain your profits earned this year by investing them in a Mexican bank where interest rates are high. Alternatively, you could invest the profits in a dollar-denominated bank account. That is, you could convert your Mexican peso profits to dollars periodically and accumulate the dollars over the year. At the end of the year, you could convert the dollars back to Mexican pesos, so that you can pay for the marketing campaign. Explain how you could decide between these two alternatives.


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