Question

Orlando Co. produces home appliances and sells them in the U.S. It outsources the production of the appliances to a Chinese manufacturer, and the imported appliances are priced in dollars. Its major competitor for appliances is located in Mexico. Based on this information, Orlando Co. is subject to ____ exposure. a. translation b. economic c. economic and transaction d. transaction

Answer 1

The correct answer is letter "B": economic.

Step-by-step explanation:

Economic exposure takes place as the risk of fluctuations in foreign currency exchanges. The highest the volatility of the currency the higher the economic exposure of the firm and vice versa.

The fluctuations can bring losses to the company as a result of changing from foreign to domestic currency moreover when part of the operational processes of the firm are handled in a country with a different currency.

Answer 2

B) economic

Step-by-step explanation:

In business, economic exposure refers to the risks that corporations face regarding the currency exchange rates of the countries that they operate in or their main competitors operate in. Orlando outsources its production to China because they can manufacture products cheaper there, while its competitors are located in Mexico.

If the yuan appreciates against the dollar, Orlando's costs will increase. While if the Mexican peso depreciates against the dollar, its competitors costs will decrease. If Orlando's costs increase, its profit margin will decrease. If its competitors costs decrease, they might lower their products prices, possibly gaining market share over Orlando.