Suppose the US dollar (USD)-Japanese yen (JPY) exchange rate moves from USD 1 =

Question

Suppose the US dollar (USD)-Japanese yen (JPY) exchange rate moves from USD 1 = JPY 100 to USD 1 = JPY 110. a.) How will this change affect profits at a Japanese automaker that produces all of its vehicles for the US market in Japan and exports to the US? b.) How would the effect be different if the automaker produced all of its vehicles for the US market at a wholly-owned US subsidiary? Explain your reasoning. Assume that the automaker’s profits are reported in yen and that the number of cars sold, the costs, and the currencies in which the costs are denominated are unaffected by the change.

Explanation / Answer

a) Here auto maker profit is resulted in Yen. And the automaker produces vehicles in Japan and export to US. So there cost to produce the vehicles will be in Yen but there profit will be in USD. In this case there JPY is depreciating from 1USD=100JPY to 1USD = 110JY. That means if they sell one vehicle from 1000USD then their profit will increase from 100,000 JPY to 110,000 JPY. Hence they will be in profit by 10% becasue their cost wont change but their revenue will increase in Yen.

b) In the second case as a wholly owned US subsidiary, their cost will and profit both will be in USD . Hence it wont affect theier profits. Even if they want to buy raw material from Japan, they will hav to pay that in USD. So no change in profit.

Thanks

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