Question

Suppose you are the CFO of Toyota and that you manufacture your cars in Japan and export the vehicles to the USA. Assuming your current profit per car is $1,000 and you sell 10,000 this year, please answer the following and show your computations:
   - From a profitability point of view, do you generally favor a strong or weak US Dollar versus the Japanese YEN? Why?
   - If the exchange rate is 1 US Dollar = 1.20 Japanese YEN, what is your profit this year in YEN?
   - If the YEN appreciates in value versus the Dollar, would profitability increase or decrease?

Answer 1

(a) I shall prefer a weak dollar, which means Yen will be stronger than dollar. So the buyers (US importers) have to pay more Yen (my domestic currency) in order to pay for exports, which will increase profit in terms of yen (my domestic currency).

(b) Current profit = $100 x ($1.2/yen) = 120 yen

(c) If Yen appreciates, US buyers have to pay more yen to pay for the cars they buy. Profitability in terms of yen will increase, provided yen appreciation does not change quantity of cars exported to US.