What can a company do to reduce risks associated with exchange rate adjustments?

To mitigate risks associated with exchange rate adjustments, establishing sufficient manufacturing plant capacity in various regions allows a company to produce goods closer to its markets. This geographic diversification can minimize the impact of currency fluctuations, as production costs and selling prices can be more closely aligned with local currencies. By having operations spread across multiple locations, the company can take advantage of favorable exchange rates and smooth out the effects of unfavorable ones, providing greater flexibility and stability in its pricing and cost structures.

This strategy enables the company to better respond to changes in the local economic and currency environments, effectively reducing vulnerability to exchange rate volatility. Conversely, concentrating operations in a single location could expose the company to greater risk when that region experiences currency shifts or economic instability. Other options like increasing prices might risk reducing market competitiveness, while decreasing advertising could lead to diminished brand presence, neither of which directly addresses the inherent risks associated with fluctuating exchange rates.