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Chapter 29: Problem 13

In its 2016 Annual Report, Amazon stated, "We have foreign exchange risk." a. Briefly explain why Amazon is exposed to foreign exchange risk. b. If Amazon did not have operations in foreign countries, would its profit be affected in any way by fluctuations in the exchange value of the U.S. dollar? Briefly explain.

Short Answer

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Amazon is exposed to foreign exchange risk because it operates globally and its revenues and costs depend on the exchange rates between local currencies and the U.S. dollar. If Amazon didn't have foreign operations, its profits would be largely unaffected by fluctuations in the U.S. dollar value, although the competitiveness of its prices for imported goods might be impacted.

Step by step solution

01

Amazon's Exposure to Foreign Exchange Risk

Amazon is exposed to foreign exchange risk because it operates globally, which means it makes sales and incurs expenses in countries around the world. Consequently, its revenues and costs in those countries depend on the exchange rates between their local currencies and the U.S. dollar. If the value of those local currencies decreases relative to the U.S. dollar, Amazon's revenue in U.S. dollars will decrease, which could negatively impact its profitability.
02

Impact on Profits Without Foreign Operations

If Amazon did not have operations in foreign countries, its profits would be insulated from fluctuations in the value of the U.S. dollar in relation to other currencies. Any change in the value of the U.S. dollar would just affect the purchasing power of its U.S. customers, and not directly affect Amazon's revenue and expenses. However, it might impact the competitiveness of Amazon's prices for imported goods. An increase in the U.S. dollar value makes imports cheaper, which could potentially drive down Amazon's prices and decrease its profit margins.

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Most popular questions from this chapter

(Related to Solved Problem 29.1 on page 1034 ) An editorial in the Wall Street Journal in 2017 made the following observation: "When the U.S. has a current- account deficit it has to have a capital-account surplus of the same amount." Briefly explain whether you agree with this observation.

Why might "the continued willingness of foreign investors to buy U.S. stocks and bonds and foreign companies to build factories in the United States" result in the United States running a current account deficit?

A 2017 Dow Jones Newswire article about Toyota noted, "The company has long been committed to building at least three million vehicles a year in Japan, in part out of a desire to provide jobs in the country.... That was an easier decision when a dollar bought 120 yen two years ago." a. Does the article imply that in 2017 it took more than 120 yen to exchange for a dollar or fewer than 120 yen? Briefly explain. b. Given your answer to part (a), why would Toyota's decision to produce 3 million cars in Japan have been easier two years before this article was written?

(Related to Solved Problem 29.1 on page 1034 ) An article on the Dow Jones Newswire in mid-2017 contained the following sentence: "The U.S. current- account deficit, a measure of trade and financial flows with foreign countries widened to \(\$ 116.78\) billion in the first quarter." Does a country's current account include any financial flows between that country and other countries? Does it include all financial flows between that country and other countries? Briefly explain.

(Related to Solved Problem 29.1 on page 1034 ) In early 2017 . a Chinese news service noted, "The country will continue to run a current account surplus, as well as a ... financial account deficit in 2017 ." After reading this account, a student comments, "I thought Chinese exports were very strong, so I don't understand why the country is expected to run a financial account deficit." Clear up the student's confusion.
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