Farmington Industries Inc Managing Currency Exposure Risk Case Solution

Case Solution

The December 20, 1994 Mexican devaluation produces U.S. dollar deficits with an not prepared U.S. corporation with multiple methods in Mexico.

Excel Calculations

F-de Mexico-Balance Sheet

F-de Mexico-Income Statement

Exchange loss calculation

Questions Covered

Farmington de Mexico’s 1994 peso income statement includes an exchange loss, whereas Exportaciones S.A’s peso income statement includes an exchange gain. What accounts for this difference?

What is the effect of the peso devaluation on the operations and financial statements of the company’s maquiladora?  

What is the effect of the peso devaluation on the operations and financial statements Farmington N.V?

Prepare Farmington de Mexico’s 1994 U.S. dollar financial statements for the inclusion in the parent company’s 1994 consolidated financial statements?

Describe how Exportaciones S.A.’s 1994 U.S. dollar financial statements would differ from those prepared by Farmington de Mexico.

How well was Farmington Industries prepared for the December 20, 1994 devaluation? Be specific and indicate the consequences.  

Going forward, what actions would you recommend Farmington Industries take to mitigate or take advantage of the peso devaluation? 

What is your appraisal of the question-and-answer position of the company’s January 3 conference call? What further action would you recommend the company take to deal with the peso devaluation-related concerns of its shareholders and the investing community?