Identifying Economic Exposure
At this point, it makes sense to illustrate some of the concepts just discussed by examining several firms to see in what ways they may be susceptible to exchange risk. The companies are Aspen Skiing Company, Petroleos Mexicanos, and Toyota Motor Company
Aspen Skiing Company
Aspen Skiing Company owns and operates ski resorts in the Colorado Rockies, catering primarily to Americans. It buys all its supplies in dollars and uses only American labor and materials. All guests pay in dollars. Because it buys and sells only in dollars, by U.S. standards it has no accounting exposure. Yet, Aspen Skiing Company does face economic exposure because changes in the value of the dollar affect its competitive position. For example, the strong dollar in the early 1980s adversely affected the company because it led to bargains abroad that offered stiff competition for domestic resorts, including the Rocky Mountain ski areas.
Despite record snowfalls in the Rockies during the early 1980s, many Americans decided to ski in the European Alps instead. Although airfare to the Alps cost much more than a flight to Colorado, the difference between expenses on the ground made a European ski holiday less expensive. For example, in January 1984, American Express offered a basic one-week ski package in Aspen for $439 per person, including double-occupancy lodging, lift ticket, and free rental car or bus transfer from Denver.3 Throw in round-trip airfare between New York and Denver of $300 and the trip’s cost totaled $739.
At the same time, skiers could spend a week in Chamonix in the French Alps for $234, including lodging, lift ticket, breakfast, and a bus transfer from Geneva, Switzerland. Adding in round-trip airfare from New York of $579 brought the trip’s cost to $813. The Alpine vacation became less expensive than the one in the Rockies when the cost of meals was included: an estimated $50 a day in Aspen versus $30 a day in Chamonix.
In effect, Aspen Skiing Company is operating in a global market for skiing or, more broadly, vacation services. As the dollar appreciates in real terms, both foreigners and Americans find less-expensive skiing and vacation alternatives outside the United States. In addition, even if California and other West Coast skiers find that high transportation costs continue to make it more expensive to ski in Europe than in the Rockies, they are not restricted to the American Rockies. They have the choice of skiing in the Canadian Rockies, where the skiing is fine and their dollars go further.
Conversely, a depreciating dollar, such as occurred since 2002, makes Aspen Skiing Company more competitive and should increase its revenues and profits. In either event, the use of American products and labor means that its costs will not be significantly affected by exchange rate fluctuations.