Volkswagen sells cars in the US and is exposed to USD. Volkswagen established a production site in the US. Why is this (also) a foreign exchange exposure management strategy?Group of answer choicesIt matches USD revenues with USD costs.Volkswagen get more pricing flexibility.It is perceived as less foreign by US customersIt is not a foreign exchange exposure management strategy
Question
Volkswagen sells cars in the US and is exposed to USD. Volkswagen established a production site in the US. Why is this (also) a foreign exchange exposure management strategy?Group of answer choicesIt matches USD revenues with USD costs.Volkswagen get more pricing flexibility.It is perceived as less foreign by US customersIt is not a foreign exchange exposure management strategy
Solution
Volkswagen establishing a production site in the US is a foreign exchange exposure management strategy because it matches USD revenues with USD costs.
Here's why:
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By producing cars in the US, Volkswagen incurs costs in US dollars. This includes costs for labor, materials, utilities, and other expenses related to production.
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At the same time, Volkswagen sells cars in the US and receives revenues in US dollars.
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By matching its USD revenues with its USD costs, Volkswagen reduces its exposure to changes in the exchange rate between the US dollar and other currencies.
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If the value of the US dollar decreases, Volkswagen's revenues in other currencies may decrease, but so will its costs. Conversely, if the value of the US dollar increases, Volkswagen's revenues in other currencies may increase, but so will its costs.
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This strategy of matching revenues and costs in the same currency is known as "natural hedging" and is a common way for multinational companies to manage their foreign exchange exposure.
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