Question

As a Kia manufacturer, what actions would you take if you expected the Korean Won (local currency) to appreciate versus the dollar in real terms given that you export many of your vehicles to the US? (5):

Answer 1

Solution

It is given that the Korean Won appreciates relative to the US Dollar.This case of currency appreciation is a common risk faced by importing and exporting countries.

So,here when the Korean Won appreciates,the exports of Kia become expensive for the consumers in the US (so the sales will reduce) and also the profits Kia gets will also reduce because the US consumers will pay in USD and these are converted to the local currency (Korean Won),now less Korean Won for USD in comparision to before.

So, Kia can opt for long-term sales contracts with it's distributors in the US where they can lock the currency excahnge rate at which partcular number of units and / or the period for which it is valid.In this way they can remove the effect of currency fluctualtion and stabilize their sales.

They can also NOT change the pricing  of the Kia cars (in dollars) in the US markets.Kia can just hold the US dollars they are getting from sales in US and convert them to Korean Won whenever the exchange rate becomes favorable to them.

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