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  3. short term exchange rate risks can be hedged. but,

Short term exchange rate risks can be hedged. But, what about the long term risks...

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Accounting

Short term exchange rate risks can be hedged. But, what about the long term risks like that posed by the Japanese yen strengthening from 300 yen to the U.S. dollar to 100 yen to the U.S. dollar over a 20 year period? A Toyota Corolla that costs 3,000,000 yen to build at 300/1 would cost $10,000 to build and could sell for $13,000 which is a 30% profit. But, at 100/1 3,000,000 yen would cost $30,000 to build and would be priced out of the market. The answer was to build Toyota cars in the U.S. to avoid the risk of long term exchange rates. Discuss the decision making process in terms of "immunizing" the Income Statement and "immunizing" the Balance Sheet.

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