How might the Japanese and US companies manage their currency exchange risks?
Existing multinational contracts Currency exchange risks on current contracts can be managed using a financial hedge such as a currency option. These are options to sell or buy a stated quantity of foreign currency at a stated price or exchange rate. Thus in first example above, the US medical electronics company could buy an option to purchase 16,800,000 yen at the date of transistor delivery, locking in the yen price as of the date of the currency option contract. If the price of the yen falls, the US medical electronics company can let the option expire and simply purchase the yen from a bank. If the price of the yen increases, the company can exercise the option and purchase the yen through the option. Future multinational contracts Future contracts represent real operating risk. Such risk cannot be dealt with solely through financial hedging. Rather this risk requires more strategic maneuvers involving changes in marketing and/or production strategies.
