Motorola’s Argentine peso translation exposure. U.S.-based Motorola has a wholly owned subsidiary in Argentina that assembles consumer electronics products for sale there. The net worth of the Argentine subsidiary is currently Argentine peso (ARS) 250 million. Because of recent labor strikes in Buenos Aires, Motorola’s treasurer is concerned that the peso could depreciate by as much as 20 percent against the dollar from its present level of ARS 4. 5 per US$1. The treasurer believes that this exposure should be hedged with a forward contract.

The three-month forward exchange rate is ARS 5 = US$1. Motorola uses the current method to translate foreign currency financial statements into dollars.

a. What is the functional currency of Motorola’s Argentine subsidiary?

b. Do you agree with the treasurer about the need to hedge? What are the arguments for and against hedging this exposure?

c. What is the cost of hedging?