Suppose a U.S.firm builds a factory in China, staffs it with Chinese workers, uses materials supplied by Chinese companies, and finances the entire operation with a loan from a Chinese bank located in the same town as the factory.This firm is most likely trying to greatly reduce, or eliminate, which one of the following?

Question

Quizplus · Accepted Answer

By building a factory in China, staffing it with Chinese workers, using materials supplied by Chinese companies, and financing the entire operation with a loan from a Chinese bank, the U.S. firm is effectively reducing its long-run exposure to exchange rate risk. This is because it is producing and selling goods in the same currency as the local market, and is not subject to fluctuations in exchange rates over the long-term.