Question

2) In the following scenarios, does the American firm have high or low operating exposure to currency fluctuations and why.

a) American Publishing Inc. produces books domestically and has no exports. Its primary competitor is a British firm. Assume that the price elasticity of demand is high for all firms.

b) American Chocolate produces candy and has no exports. Its primary competitor is a Swiss firm. Cocoa is the primary input and manufacturing cost for both firms. Cocoa is only available from Brazil.

c) American Lamp only sells lamps in the U.S. and has a German competitor. Assume American Lamp moves all its manufacturing operations to Denmark, but continues to sell only to the American market. On what does your answer depend?

Answer 1

a)American publishing has no operating exposure to currency fluctuations because the company produces books domestically and has no exports.
Since the price elasticity of demand is high for all firms the company is able to maintain its cost because the company has no exposure to currency fluctuation.

b)The American chocolate producer has low operating exposure to currency fluctuation as the cocoa is the primary input in manufacturing cost and Cocoa is only available from Brazil for which the company is required to make payment only in foreign currency hence the company is exposed to currency fluctuations.

The company is required to make payment for cocoa only which is the primary ingredient in producing chocolate however other raw material and processing are done in-home currency in the home country only hence the foreign currency fluctuation exposure is low.

c)American lamp has a high level of operating exposure to currency fluctuations since the manufacturing operations of lamps are done in Denmark for which the companies required to make payment in foreign currency.
since all the manufacturing operations of lamp is outsourced to Denmark therefore the costing of the lamp is highly dependent on the foreign currency fluctuations.

the answer depends on the payments made in foreign currency for purchasing products of manufacturing them. the payments made in foreign currency involve greater risk as they are fluctuation and difficult to predict which in result affects the cost of our products manufactured or services offered.