A U.S.-based multinational corporation has a wholly owned subsidiary in the Philippines that manufactures electronics products to be sold in the North American market. The equity of the Philippines subsidiary is peso 2,500 million (from the latest balance sheet data). Because of recent political uncertainties in the Philippines, the multinational's head office in San Jose, California, is concerned that the peso could depreciate by as much as 20 percent against the dollar from its present level of 50 pesos per $1. The chief executive officer (CEO) believes that this exposure should be hedged with a forward contract. The three-month forward exchange rate is 53 pesos per $1. The U.S. company uses the current method (Financial Accounting Standards Board [FASB] 52) to translate foreign currency financial statements into dollars.
Do you agree with the CEO? What are the arguments for and against hedging this exposure? For simplicity, assume that the subsidiary does not pay any tax.