Loans and money issues

Forward contracts are not the only method of currency hedging. For example, we know that a company that purchases inputs in its home currency and has sales in a foreign country is exposed to a rise in its home currency against the foreign currency. If it sets up a foreign operation, which can then also purchase its inputs in the foreign market in foreign currency, then its currency exchange risk will be much lower—both costs and revenues would occur in the same currency. Further, such international operations often create a “real option”, whereby companies can shift some production from the high-cost country to the low-cost country when exchange rates shift—and they can create important profitable or unprofitable tax implications that require armies of tax experts to understand. Automakers in particular have invested heavily in such strategies: most Toyota Camrys for the United States are produced in Georgetown, Kentucky (but many are reexported to Japan!); BMW has manufacturing facilities in Georgia, Illinois, and California; and Ford and General Motors have large European subsidiaries.