Question

The average Japanese car has between 20-40% Japanese content. This is because a significant number of the Japanese cars marketed in the US were also produced at plants in the US. How does reducing the amount of Japanese content affect the foreign exchange rate exposure of the Japanese car makers? How does it affect the operating exposure of GM to movements in the yen/dollar exchange rate? Explain.

Answer 1

General motors can be exposed to the fluctuations of Japanese Yen & American Dollars as it is exposed to both the countries and when the value of dollars will be appreciating,it will mean that the receivables from Japan is going to decrease for the general motors and it will also mean that the overall payables in Japanese Yen is also going to decrease.

When the Japanese Yen are going to appreciate against the American dollars, it will mean that the receivables in Japanese Yen are going to appreciate for the company and the cost of Japanese Yen are also going to be lower so it can expose itself mostly to Japanese yen whereas American receivables will be lower and American cost will also be higher.

When we are looking for the Japanese manufacturer then appreciation of Japanese are negative for them as they have mostly shifted their production in America and it will lead to increase in the cost and when there will be a depreciation in Japanese yen, it will mean that there will be a decrease in their overall cost.