Exposure to Real Exchange Rate Risk

Assume that Toyota manufactures cars only in Japan and sells 25% of its output in the USA at USD prices. Assume also that Ford Motor produces cars only in the USA and sells most of its cars in the USA at USD prices. Assume also that neither Toyota nor Ford engages in any financial hedges.

a. Under these assumptions it is correct to say that

1. Ford has a positive (asset) exposure to the JPY

2. Ford has a negative (liability) exposure to the JPY

3. Ford has zero exposure to the JPY

4. We cannot draw any conclusions about Ford's exposure to the JPY

b. Give a brief explanation for your answer

Now assume that Toyota opens a factory in the USA that can produce 50% of the cars that it sells in the USA at USD prices.

c. The impact of Toyota's new factory on Ford's exposure is

1. This will lower Ford's exposure to the JPY

2. This will increase Ford's exposure to the JPY

3. This will have zero impact on Ford's exposure to the JPY

4. We cannot draw any conclusions about the impact on Ford's exposure to the JPY

d. Give a brief explanation for your answer