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A bank customer called to withdraw money from his account and wire it to a bank in Mexico. This seemed a bit unusual so I asked, "Is this a gift to a relative, or have you purchased some goods?"
He replied, "No, I'm sending it to my own account at a Mexican bank." Asked if he planned to live in Mexico, he said, "No."
"Then why would you send money to Mexico?" I asked.
"I have a friend working and living in Mexico," he said. "He told me that if I deposit money in a Mexican bank for one year, I will earn 50% interest."
When asked if he considered the risks, he responded, "What risks?"
I asked, "First, is your deposit in pesos or dollars?"
"Pesos," he replied.
"Then you bear the risk of currency exchange rate differences and you could lose considerable money," I informed him. "Furthermore, the government of Mexico could freeze your deposit and you may never get it back. Any action on the part of the government can increase your risk." Bankers commonly refer to this as sovereign risk.
Then he inquired if he could transact a forward contract with the bank to protect himself against adverse rate movement. I explained the simple and precise calculation using the interest rate differential between the two countries to determine the premium or discount on a forward rate. If he chose to leave the money in the U.S. and earn interest at prevailing rates, or chose to put pesos on deposit at a Mexican bank, earn interest, and lock in a forward rate, he would come out exactly the same at the end of the time period.
After considering the risks, and the possibility of no return at all, he decided to leave his money safely in the U.S. bank he trusted.
What do you think? Is investing money in foreign banks worth the risk?
| Product Model | Inside Diameter | Outside Diameter | Thickness |
| PSMF354540A51 bearing | 35 | 45 | 40 |
| PSMF354535A51 bearing | 35 | 45 | 35 |