Question

If the dollar, the yen, or the euro becomes seriously overvalued, a company with a production capacity in other locations can achieve competitive advantage by:

A) buying different currencies before major fluctuations take place.
B) conducting transactions in different currencies of the world.
C) shifting production among different sites.
D) cutting down production and waiting until the currency rate is reasonable.
E) reducing production and labor force simultaneously.

Answer 1

A company can cope with an overvalued currency by shifting production among sites in different locations, leveraging international capacities to mitigate exchange rate risks and maintain competitiveness.

Step-by-step explanation:

When faced with a scenario where the dollar, yen, or euro becomes significantly overvalued, a company with production capabilities in different locations can maintain a competitive edge by shifting production among these sites. This strategy allows the firm to take advantage of lower costs in countries with weaker currencies, thereby reducing the negative impact of the overvalued currency on their profits. It is a form of currency risk management that enables businesses to respond flexibly to exchange rate fluctuations.

Engaging in practices such as buying different currencies before fluctuations or conducting transactions in different currencies can be speculative and involves considerable risk. Reducing production and the labor force might address cost issues but doesn't leverage the company's international production capacity to adapt to currency market changes. Therefore, shifting production is the most strategic response to maintain competitiveness in the face of overvalued currency conditions.