Managing Foreign Exchange Risk

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Managing Foreign Exchange Risk

Everything about the deal was acceptable to PEMEX and Hyundai in September, 2010. The final negotiated price for 7500 new Hyundai “Aguila” automobiles was 58 Billion KRW (Korean Won). Payment was expected upon delivery, scheduled for exactly twelve months later. As PEMEX CFO Carlos Trevino saw it, there was one major concern: foreign exchange risk. A decision had to be made fast, due to the operating contract with the Mexican Government and Mexico City officials. Covenants restricting the ability of PEMEX to take on new debt made it critical that Carlos be sure about risk exposure before finalizing the deal.

Seven years ago PEMEX had begun developing a hybrid ‘clean’ fuel to reduce carbon emission as pollution had reached all time highs in many urbanized areas of Mexico and especially Mexico City. Since taking office in 2006 Mexican President Felipe Calderon had made efforts to reduce pollution levels across Mexico and placed particular emphasis on Mexico City. President Calderon, upon hearing of the new clean fuel technology being developed at PEMEX asked the president of the company, Mr. Juan Suarez, to work with an auto manufacturer to create a fleet of new fuel efficient taxis to replace the many aged taxis contributing to the pollution within the city. As the government had offered a fixed contract with PEMEX to help offset costs, there was great pressure to make a deal before the 2012 elections and to ensure that PEMEX would not come in over budget due to exchange risk or others issues. Hyundai Motors of Korea offered to create a new automobile the “Aguila”, designed to work with the new clean fuel technology of PEMEX for an acceptable price.

In the preceding five years, the value of the Mexican Peso had dramatically increased and decreased against most international currencies, and the majority of analysts refused to guess when it would stop varying so wildly. The value of the Korean Won per Peso had ranged from...
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