The exchange rate
The exchange rate between the U.S. and Japan might be defined as flexible rather than fixed since the values of the currencies change daily. According to the website of The Federal Reserve, on June 8, 2020, 1 U.S. dollar cost 108,46 Japanese yen, while on June 12, 1 U.S. dollar equaled 107.36 Japanese yen (Foreign exchange rates, 2020). Adekola and Sergi (2007) suggest that “countries with fixed exchange rate regimes are more vulnerable to currency and banking crises,” while countries with flexible exchange rates “tend to do better on effective management of macroeconomic policy and functioning institutions” (p. 4). The example of the Japanese company Toyota will be used to illustrate the processes and risks involved in currency exchange.
The resulting value of selling
The resulting value of selling Japanese goods in the United States depends on the current exchange rate between the countries. The prices of Japanese products sold in the U.S. depend on the appreciation and depreciation of the currency. For example, “if the U.S. dollar depreciates relative to the Japanese yen, U.S. residents have to pay more dollars to buy Japanese goods” (Arnold, 2008, p. 437). Therefore, the resulting value of a Toyota car sold in the U.S. would increase, as the dollar decreased in value, or depreciated, during the given period.
Inflexible foreign currencies is fluctuating
Based on the current weekly data, it might be concluded that the profitability of foreign companies dealing with inflexible foreign currencies is fluctuating. For instance, during the period from June 8 to June 12, the dollar’s value decreased. If the order was placed on Monday but paid for in dollars on Friday, Toyota’s profitability would have increased, since the exchange rate became more favorable for the Japanese company.
Multiple risks
Financial managers of companies such as Toyota might face multiple risks related to currency rate changes in a period between the placement of the order and its delivery and payment. The business might be in a dangerous position when dealing with a foreign currency, which is different from the local (Kantola et al., 2019). There is a risk of price changes, which might negatively affect the company’s profitability by decreasing product cost and asset value. Another risk is associated with tax rate changes, which might lead to an increase in export expenditures and a decrease in profits from product sales. Therefore, the financial managers of Toyota must consider hedging as a way to eliminate the risks involved in currency exchange.
References
Adekola, A., & Sergi, B. (2007). Global business management: A cross-cultural perspective. Ashgate.
Arnold, R. A. (2008). Macroeconomics. Cengage Learning.
Kantola, J. I., Nazir, S., & Barath, T. (Eds.). (2019). Advances in human factors, business management and society. Springer.
Foreign exchange rates – H.10 weekly. (2020). The Federal Reserve. Web.