Consider the following illustrative exchange rates:
U.S. Dollars Required to Buy
One Unit of Foreign Currency
Japanese yen 0.009
Australian dollar 0.650
Assume Citrus Products can produce a liter of orange juice and ship it to Japan for $1.75. If the firm wants a 50 percent markup on the product, what should the orange juice sell for in Japan?
Now, assume Citrus Products begins producing the same liter of orange juice in Japan. The product costs 250 yen to produce and ship to Australia, where it cam be sold for 6 Australian dollars. What is the U.S. dollar profit on the sale?
What is exchange rate risk?