Operating (Economic) currency exchange risk is the risk that a continuing directional change in an exchange rate will negatively impact the economics of a firm’s business and cause the business operations to be modified. For example the Japanese yen vs. U.S. dollar exchange rate changed from 350 yen to the dollar to 100 yen to the dollar over a period from the 70’s to the 90’s. This meant that if Toyota spent 3,500,000 yen to build a car (Corolla) in the 70’s the dollar cost was $10,000. In the 90’s the dollar cost was $35,000. That would put the Toyota in a price disadvantage. A Corolla that costs 3,500,000 yen to build in the 70’s ($10,000) could be sold for $13,000 in the U.S. A Corolla that costs 3,500,000 yen to build in the 90’s ($35,000) would not be marketable for $45,500 in the U.S. Because of the long term change in the yen / dollar exchange rate the economics of Toyota selling a Corolla in the U.S. had changed. Additionally, in this instance, if a company finds it has an asset denominated in a foreign currency it should create a long term liability in that same currency.
1.) What caused the long term change in the yen / dollar exchange rate?
2.) Could Toyota hedge the currency over a long period of time and avoid the risk?
3.) How could Toyota change its operations and save its U.S. market sales?
4.) Why does a liability need to be created on the balance sheet and why in the same currency?
5.) What would be the determining factors in issuing a bond in a foreign currency? (think of cost of capital)
Type of service:Academic paper writing
Type of assignment:Research Paper
Pages / words:2 / 550
Number of sources:5
Academic level:Junior (College 3rd year)
Language style:US English