Assume that a Japanese car manufacturer exports cars to U.S. dealerships, which are priced in yen. The demand for those cars declines when the yen is strong. The manufacturer also produces some cars in the U.S. with U.S. materials and those cars are priced in dollars. The manufacturer could reduce its economic exposure by:

Question

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By producing more automobiles in the U.S. with U.S. materials and pricing them in dollars, the manufacturer can reduce its economic exposure as the demand for those cars will not be affected by currency fluctuations. This would also provide a natural hedge against currency fluctuations, as the revenue earned in dollars will offset any losses incurred due to a strong yen. Closing down U.S. plants or relying completely on Japanese suppliers would not address the issue of currency risk, while pricing exports in dollars could lead to a loss of competitiveness if the dollar appreciates against the yen.

Assume That a Japanese Car Manufacturer Exports Cars to U