Question

Please explain why Toyota and other Japanese car manufacturers moved their plants to US. Does this move qualify as transaction or economic exposure? How did it reduce FX volatility for the company?

Answer 1

Toyota and other Japanese car manufacturer has shifted their plants to United States of America as they want to diversify themselves and they also want to have an exposure to the other markets and they also want to have a reduced exposure to the United States dollars by producing in the United States.

Shifting their plants to United States of America is also reflecting that these companies wants to lower their cost of operation and reduce their risk of fluctuations against United States dollar so,they are trying to take position in United States dollar by producing in America only and they are trying to diversify their business also.

This is a type of an economic exposure because they are exposed to the unexpected suddenness of change in the Macro conditions of United States of America and this is not a transaction or translation exposure because this is not being done through import and export or through subsidiaries so this is a type of economic exposure which is exposing the company to large amount of foreign economy fluctuations.

Economic exposures can be leading to forex fluctuations and these could be reduced to certain extent by taking position into the foreign exchange trading to a large extent to which will be reducing the overall exposure of these companies to the foreign exchange. So, foreign exchange trading will be helping to reduce the economic exposure of these companies to a large extent.it is a heading technique with used to hedge against any kind of unexpected macro volatility