Orlando Co. produces home appliances and sells them in the U.S. It outsources the production of the appliances to a Chinese manufacturer, and the imported appliances are priced in dollars. Its major competitor for appliances is located in Mexico. Based on this information, Orlando Co. is subject to ____ exposure.

Question

Quizplus · Accepted Answer

Orlando Co. is exposed to economic exposure because it is affected by exchange rate fluctuations between the U.S. dollar and the Chinese currency, which can impact the cost of producing and importing the appliances. Furthermore, the company's major competitor is located in Mexico, so any changes in the exchange rate between the U.S. dollar and the Mexican peso may also affect its competitiveness in the domestic market. However, since the appliances are priced in dollars, the company is not subject to transaction exposure. Translation exposure is also not applicable since Orlando Co. does not have any foreign subsidiaries whose financial statements need to be translated into U.S. dollars.