Argentenian Currency decline - What to do.

George Hardwood CEO of Magna Technology ITC, a private company was very concerned about the continuous devaluation of Argentinian Peso on his Argentinean business and the declining value of cash held in Argentina. He had seen a significant divergence rate of conversion in Argentinean Peso to US Dollar. On October 23, 2023 he called his in his CFO Brett Long for a complete update on the situation. Brett made the following points Magna Technology had 800 M Pesos in their bank in Argentina. While the official rate was Peso 350/$, any conversion to US $ could be made only at Peso 800/$. This would mean a currency translation loss. Further the country had an inflation rate of over 100% and the employees in Argentina was requesting salaries to be indexed to US Dollars to maintain their purchasing power. On the revenue side, the company was billing their customers in Pesos but have a provision to increase the contract rate of billing to match the inflation. However, the company while profitable, is facing a significant currency translation loss on current cash balance and will continue to face the currency risk in business as long as the inflation remains above 100%. George asked for options on future course of action. The next week, CFO Brett Long called George and presented the options that they had 1) Linked to US dollar FIXED RENT: Galileo Premium Common Investment Fund: Invests in Argentine corporate bonds denominated in dollars. It can be subscribed and redeemed in pesos. VARIABLE INCOME: CEDEARS: These are assets or titles that are listed in the Argentine market, and that represent foreign shares or ETFs (Exchange Traded Funds). They are adjusting their price in pesos, according to the movement of the share abroad and the CCL. Therefore, we could invest in a not so volatile asset, such as KO (Coca Cola), DIA (Dow Jones Index) or SPY (S&P 500 Index). 2) Dollar Linked (linked to official exchange rate) -ON Dollar linked: Corporate bonds of Argentine companies that are tied to the movement of the official exchange rate. Keep in mind that they are paid more expensive today due to the expectation of devaluation (with a negative rate). In the event that there is a change in expectations, the rate will surely become positive and therefore, the ideal is to keep it until maturity so as not to be harmed. Below is an example that they sent us to explain. None of these options would prevent the company from taking the loss on current holdings but may mitigate future currency losses. George had another dilemma. He had debt that had covenants related to leverage ratios. Taking a translation loss and bringing down the value of cash in the books, would breach the debt covenants and that would mean renegotiating with the creditors who would demand higher interest rates on the debt. George called a board meeting to discuss the options and take a decision on future course of action. Learning outcome The case deals with Foreign Exchange Risk Management, when operating a subsidiary in a high inflation country with deep and persistent currency depreciation.