here's my advise based on recent trips.
we usually use the atm and withdraw pesos -- yes this works best. however we have read multiple reports of atm machines being rigged and people cleaning out your account -- so in a few weeks when we go, we are taking US cash and exchanging it at the bank or at one of the stands.
if you do want to exchange at a bank -- you will need your passport with you to do so.
if you exchange at your hotel - you normally have to show your passport the first time for the exchange.
have a good trip!