Nissan announced that it was closing some factories in Japan and shifting produc

Question

Nissan announced that it was closing some factories in Japan and shifting production to the United States to shelter itself from foreign exchange risks that it faces when exporting cars to the United States. Describe the risk that Nissan is concerned about. United States and whether or not they are a better solution than moving production to the United States. Pick a foreign currency of your choice and graph the value of the currency against the U.S dollar over the pas. 12 months. Based on what has happened to the exchange rate, describe the financial challenges facing an exporter from that country or an exporter to that country. In the chapter, we discussed how companies can use derivative financial instruments i hedge against a potential loss on a foreign currency receivable or payable. If there a possible losses from denominating receivables and payables in a foreign currency, don't firms insist that receivables and payables always be in their own currency inst of a foreign currency ? Siemens is a German company that generates its revenues in energy, industry i mation and

Explanation / Answer

Japan faces the risk of fluctuating exchange rates of currencies. If products are being exported to the U.S. then the exchange rate of Yen to Dollars matters a lot as it can be a gain or a loss.

Currency exchange rates can improve or reduce investment returns when translated into your home currency. But hedging an international investment will limit the effect of exchange rate fluctuations.

A decision to hedge will seek the return of the underlying investment only, minus expenses (including hedging costs). It’ll also forgo positive or negative returns from a currency’s relative strength or weakness.

In the case of bonds, currency exposure adds significant volatility to an asset that is relatively stable in price. Stocks, on the other hand, already have high volatility, so the effect of adding currency volatility is less pronounced.

For international stocks, the benefit of hedging is smaller, while the costs remain the same. Meanwhile, the benefits of hedging currency risk in international bond portfolios generally outweigh the costs (see “Hedging currency risk,” below). Some products charge an extra fee for hedging. The cost for large investment providers that can leverage their size will likely be less. And some providers may choose to absorb the cost, letting the investor decide solely on hedged or unhedged. The benefits of hedging also depend on the investor and the currency.

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