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The Forward Contract: The Eduction of Manufacturing Capabilities

One of the first steps the company should consider is the reduction of manufacturing capabilities in Mexico. The global companies heavily rely on local suppliers and partners which provide raw materials for production (Shackman, 2015). Therefore, the expenditures will increase relative to the growth of the currency value in Mexico. In case, if the company wants to maintain the same level of production, it should use the forward contract as a tool to secure the current price of the resources from local suppliers (Shackman, 2015). It will secure the financial state of the foreign branch of the company from an increase in production cost, which will also increase the end price for the customer.

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Furthermore, in India and Brazil the company can lose the revenue, and it can use futures as hedging in order to preserve the same amount of revenue. If the company puts the futures on currency rate decrease in India and Brazil, it will save the same revenue (Avadhani, 2010). Taking into account the rates at which the currency value drops, the company might also consider other foreign markets to balance the difference. For instance, while in Mexico the currency exchange rate grows, the company can expand its production in India and Brazil. Due to the decrease in prices, compared to the dollar, the company might be able to produce cheaper products and sell them at higher rates in Mexico.

If the company expands its production in India and Brazil, it can also use cheaper workforce, as the value of local currency decreases. It will be able to save the cost of the end product and use this difference for transportation expenditures (Avadhani, 2010). However, the company has to consider the reasons why the currency value drops in India and Brazil. There might be situations like war or economic stagnation which are almost impossible to exploit. Furthermore, the environment can reduce the stability of the economy dramatically; hence, in this case, the best option will be to leave the local market and save the resources.

References

Agarwal, O. (2009). Chapter 5: Foreign exchange risks. In International financial management. Mumbai, India: Himalaya Pub. House.

Avadhani, V. (2010). Chapter 7: Management of international transaction exposure. Accordingly. In International financial management. Mumbai, India: Himalaya Pub. House.

Shackman, J. (2015). The economic and financial environment of international business. Trident University International, Cypress, CA.

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"The Forward Contract: The Eduction of Manufacturing Capabilities." StudyCorgi, 29 Dec. 2021, studycorgi.com/the-forward-contract-the-eduction-of-manufacturing-capabilities/.

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StudyCorgi. "The Forward Contract: The Eduction of Manufacturing Capabilities." December 29, 2021. https://studycorgi.com/the-forward-contract-the-eduction-of-manufacturing-capabilities/.

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StudyCorgi. 2021. "The Forward Contract: The Eduction of Manufacturing Capabilities." December 29, 2021. https://studycorgi.com/the-forward-contract-the-eduction-of-manufacturing-capabilities/.

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StudyCorgi. (2021) 'The Forward Contract: The Eduction of Manufacturing Capabilities'. 29 December.

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