Question

Measuring and Managing Operating Exposure

Ayota Car Company produces a car that sells in Japan for ¥1.8 million. On September 1, the beginning of the model year, the exchange rate is ¥150:$1. Consequently, Ayota sets the U.S. sticker price at $22,000.

Would Ayota be helped or hurt by dollar depreciation? Suppose by October 1, the exchange rate has dropped to ¥135:$1. How much Yen will Ayota receive per sale?      

Answer 1

Dollar depreciation means that 1 dollar is worth less than what it was before, meaning less valuable as against the otehr currency. For example, If Rs/Dollar exchange rate drops from Rs. 70/ $ to Rs 60/$, it means that the dollar currency has depreciated against Rupee.

As per the Question, Ayota Company has Yen receivable in the form of sales exports and hence a dollar depreciation will hurt the Company's revenues due to reduction in sales value.

On Oct 1, the exchange rate drops from 150/$ to 135/$, meaning that dollar has depreciated. Thus sales realization of Ayota Company from Japan will fall. At the prevailing rate of 135/$, Ayota will receive $ (22,000*135)= $ 29,70,000 per sale.