Hedging Transactions Involving Foreign Exchange Risk – A Primer: Falling in Love with a Puerto Vallarta Condo (Part C– Epilogue)

© 2015 Prof. Farok J. Contractor, Rutgers University

CASE STUDY (C)—EPILOGUE: The Negotiated Settlement

The two case studies presented examine foreign exchange risk from two perspectives:

(Part A) An American couple has put a down payment on a lovely new condo in Puerto Vallarta, agreeing to pay 5,000,000 Mexican pesos on delivery of the condo in 12 months. 

(Part B) But the next day, they have second thoughts and offer the Mexican real estate developer $307,000 instead. The Mexican firm needs to consider the foreign exchange risk from its perspective—while ensuring the sale.

(Part C) On the third morning, the Mexican real estate developer makes a counter offer that initially seems counter-intuitive: to accept a lower amount of $305,000 provided it is paid in two installments—$5,000 wire-transferred immediately and $300,000 paid on completion of the apartment 12 months later. The apparent justification is that a significant up-front payment by the American buyers would greatly reduce the likelihood they will back out of the deal. CONTINUED ON ARCHIVE

Printable Version: Hedging Transactions_Part C_FJContractor_2015

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