Kleine Autos is a German car manufacturer. They only have German suppliers and only sell cars in Germany. Why Kleine Autos is exposed to foreign exchange risk?Group of answer choicesThey are not exposed to foreign exchange riskTheir customers might export the cars abroadTheir customers might pay in another currencyThey have non-German competitors
Question
Kleine Autos is a German car manufacturer. They only have German suppliers and only sell cars in Germany. Why Kleine Autos is exposed to foreign exchange risk?Group of answer choicesThey are not exposed to foreign exchange riskTheir customers might export the cars abroadTheir customers might pay in another currencyThey have non-German competitors
Solution
Kleine Autos is exposed to foreign exchange risk because they have non-German competitors.
Here's why:
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Even though Kleine Autos only operates in Germany, the global car market is highly competitive. This means that they are competing with car manufacturers from all over the world, not just those in Germany.
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If the value of the Euro decreases compared to other currencies, foreign cars could become cheaper for German consumers. This could lead to a decrease in sales for Kleine Autos.
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On the other hand, if the value of the Euro increases, the cost of raw materials and parts that Kleine Autos imports from other countries could become more expensive. This could increase their production costs and reduce their profit margins.
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Therefore, even though Kleine Autos only operates in Germany, changes in foreign exchange rates can still have a significant impact on their business. This is why they are exposed to foreign exchange risk.
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