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In this paper I intend to introduce the relevant options available to a multi-national enterprise when dealing with foreign exchange risk I am going to use Toyota Motor Corporation throughout as an example Toyota is the worlds third largest automaker It was established in Japan on August 28th 1937 and apart from its 12 plants in Japan has 54 manufacturing companies in 27 countries employs 246700 people and markets vehicles in more than 160 countries Toyota website 2004 Toyota is exposed to the fluctuation in foreign currency exchange as it operates mainly in America Europe and Britain It is therefore affected by the fluctuation in the value of the US dollar the Euro and to a lesser extent the British pound Toyotas consolidated financial statements which are presented in the Japanese yen are affected by the foreign exchange fluctuation as all the amounts in the various countries currencies have to be translated into yen There is no one clear definition of foreign exchange risk It takes into consideration the level of exposure that a multi-national enterprise has on foreign markets When we speak of foreign exchange exposure we are referring to the risk that future changes in a countrys exchange rate will have positive or negative effects on the firm The value of the Japanese yen has fallen generally for the past three years against the dollar and the Euro though there had been periods of fluctuations Changes in foreign exchange rates affect a multi-national enterprises revenue gross margins operating costs operating income net income and retained earnings Toyotas cost and liabilities are affected by transaction exposure which relates primarily to sales proceed from Toyotas non-domestic sales produced in Japan It is also affected to a lesser extent sales proceed from Toyotas Europe sales produced in UK The first step in management of corporate foreign exchange risk is to acknowledge that such risk does exist and that managing it is in the interest
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