Farmington Industries Essay

991 Words Nov 29th, 2014 4 Pages
Farmington Industries
Case Write-Up

Farmington Industries is a small, publicly traded U.S.-based corporation, which produces programmable control instruments. With high interests in Mexico, the company has expanded to four Mexican-related businesses, which are listed below along with their specific function:

• The Maquiladora Assembly Facility – This facility is used to assemble imported U.S.-manufactured components into final products for sale mainly in the U.S. Seeing as the majority of sales occur in the U.S., this facility generates its revenues in USD.
• Farmington (Antilles) N.V. – This facility is an offshore “shell corporation” by which the U.S. parent exports U.S.-manufactured products to Mexico and other countries.
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With drastic fluctuations in the exchange rates, the company is left highly exposed to currency risk and the company should take more steps to hedge unexpected losses. A possible option could be to lock in a forward exchange rate, through a contract with an investment bank, therefore limiting their currency risk exposure. Looking at the situation from a different angle, we can see the devaluation of the peso as an opportunity for Farmington Industries. The company could convert their USD revenues to MXN at better rates, as the USD is much stronger now. By taking advantage of this, Farmington Industries can pay much less to run their operations in Mexico, and could also be advantageous for Farmington to use MXN in expenditures, when billing customers in USDs.

In my opinion, the conference call did not go very well, as Farmington’s executives did not answer all of the Wall Street analyst’s questions very well. One executive was unable to answer a question about how the peso devaluation would affect their earnings per share for 1994-1995. When reading the transcript, he seemed quite unprepared for a standard investment-banking question, which most investors would ask. This shows a lack of knowledge about their current situation, and reflects quite poorly on them. When looking at the standpoint of an investor,

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