A retailer in Mexico wants to buy $100,000 worth of Apple computers from the United States. The Mexican retailer has pesos while the seller in the United States requires to be paid in U.S. dollars. Explain how this transaction is completed with particular emphasis on the foreign exchange market and banks in the United States and Mexico.

Question

What will be an ideal response?

Answer 1

POSSIBLE RESPONSE: The Mexican buyer has to sell pesos to obtain dollars to pay the U.S. exporter. The Mexican firm contacts its bank and requests a quotation of the exchange rate for selling pesos and acquiring $100,000. If the rate is acceptable, the Mexican firm instructs its bank to take pesos from its checking account, convert it into $100,000 and transfer the dollars to the U.S. producer. The Mexican bank holds dollar-denominated deposits in the United States, for example, at its correspondent bank in New York. The Mexican bank instructs its correspondent bank in New York to take dollars from its checking account and transfer the dollars to the U.S. producer. This completes the international payment for computers.