The Walt Disney Company's Yen Financing, Harvard Case Study
Suppose a bottle of French wine is priced in France at 1000 Euros. If the e = $1/€, the cost to an American is €1000 x ($1 / €) = $1000.
Conclusion: __________________ . If the Euro appreciates ($ depreciates), will the French wine be more or less expensive? __________________ Proof: if e = $1.20 / €, the cost to an American is €1000 x ($1.20 / € ) = $1200. If the Euro depreciates ($ appreciates), will the French wine be more expensive or less? __________ Proof: if e = $.80 / €, the cost to an American is €1000 x ($.80 / €) = $800. Therefore, the price could fluctuate between $800-$1200, depending on currency movements.
POINT: if the dollar is strong (weak), French wine is cheaper (more expensive) for an American. The value of the $ in relation to the € will affect the price of foreign goods for an American. When the dollars appreciates, foreign goods/assets/services are CHEAPER. When the dollar depreciates, foreign goods/assets/services are MORE EXPENSIVE.
SUMMARY of the Advantages/Disadvantages of a Strong/Weak Currency:
1. Strong dollar = Weak foreign currency:
a. Advantages: foreign goods and services are cheap, including foreign travel. Helps the import sector of the economy, companies that sell foreign goods (Toyota dealers). Helps U.S. companies buying foreign inputs. Helps U.S. consumers - imports are cheaper.
b. Disadvantages: U.S. exports are expensive, including tourism in U.S. Hurts the export sector, companies that sell abroad, makes them less competitive. Hurts the import-competing sector - GM, for example (Toyotas from Japan are now cheaper). Domestic goods are less competitive overseas and here, because strong $ = weak foreign currency.
2. Weak dollar = Strong foreign currency:
a. Advantages: Helps the U.S. export sector. Our goods and services are cheap overseas, including tourism in US. Helps the import-competing sector like GM, domestic goods are more competitive (Toyotas made in Japan are more
Conclusion: __________________ . If the Euro appreciates ($ depreciates), will the French wine be more or less expensive? __________________ Proof: if e = $1.20 / €, the cost to an American is €1000 x ($1.20 / € ) = $1200. If the Euro depreciates ($ appreciates), will the French wine be more expensive or less? __________ Proof: if e = $.80 / €, the cost to an American is €1000 x ($.80 / €) = $800. Therefore, the price could fluctuate between $800-$1200, depending on currency movements.
POINT: if the dollar is strong (weak), French wine is cheaper (more expensive) for an American. The value of the $ in relation to the € will affect the price of foreign goods for an American. When the dollars appreciates, foreign goods/assets/services are CHEAPER. When the dollar depreciates, foreign goods/assets/services are MORE EXPENSIVE.
SUMMARY of the Advantages/Disadvantages of a Strong/Weak Currency:
1. Strong dollar = Weak foreign currency:
a. Advantages: foreign goods and services are cheap, including foreign travel. Helps the import sector of the economy, companies that sell foreign goods (Toyota dealers). Helps U.S. companies buying foreign inputs. Helps U.S. consumers - imports are cheaper.
b. Disadvantages: U.S. exports are expensive, including tourism in U.S. Hurts the export sector, companies that sell abroad, makes them less competitive. Hurts the import-competing sector - GM, for example (Toyotas from Japan are now cheaper). Domestic goods are less competitive overseas and here, because strong $ = weak foreign currency.
2. Weak dollar = Strong foreign currency:
a. Advantages: Helps the U.S. export sector. Our goods and services are cheap overseas, including tourism in US. Helps the import-competing sector like GM, domestic goods are more competitive (Toyotas made in Japan are more