Mary owns a U.S. based company and wants to open a store in Japan. She will...

Mary owns a U.S. based company and wants to open a store in Japan. She will have to exchange her USD for Yen in order to finance the rent and payroll. Which of the following situations would put her at the greatest advantage as far as the exchange rates go?

Depreciating yen relative to USD

Political unrest in the United States

Increased demand for yen

Rapid inflation in the United States

Decreased demand for USD

Solutions

Expert Solution

Mary is going to Purchase YEN for USD, so the situations, which will benefit Mary are discussed below.

Let's Evaluate them one by one.

Depreciating YEN relative to USD : This will benefit Mary as by this way Yen will become cheaper as compared to USD, and she will be able to purchase More YEN compared to USD. For e.g. Before Depreciation rate is 10.15 YEN / USD and after Depreciation rate comes as 10.155 YEN / USD, so she will be able to purchase more YEN for 1 USD. This way she be able to pay for her rent and payroll.

Political Unrest in United States: Political unrest will weaken the sentiments for future growth of US economy. This will create a downward pressure on USD and USD will become cheaper as compared to YEN. E.g. So our rate in this case will become 10.10 YEN / USD compared with 10.15 YEN / USD earlier. This will result in more cost for Mary to pay for rent and payroll as she will be able to buy Lesser YEN in one dollar. This will not benefit Mary

Increased demand for YEN: This will also increase the price of the YEN compared to USD as per the law of demand and supply which states that Price of Goods increases with increase in Demand keeping the supply constant. 10.10 YEN / USD compared with 10.15 YEN / USD earlier. This will result in more cost for Mary to pay for rent and payroll as she will be able to buy Lesser YEN in one dollar, hence no benefit

Rapid Inflation in US: Increased inflation will bring lesser demand for US goods and as a result will weaken the GDP prospects of the Country. This will slowdown the US currency. So YEN will become dearer compared to USD. This situation will not benefit Mary. 10.10 YEN / USD compared with 10.15 YEN / USD earlier. This will result in more cost for Mary to pay for rent and payroll as she will be able to buy Lesser YEN in one dollar, hence no benefit.

Decreased Demand for USD: With demand of law and supply, with decreased demand USD will become cheaper compared to YEN. So again Mary will have 10.10 YEN / USD compared with 10.15 YEN / USD earlier. which will have more costs to purchase YEN and will not benefit Mary.

As a result, only First Situation is going to Benefit her which is Depreciating yen relative to USD

jeff jeffy answered 1 month ago

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