Thanks to visit codestin.com
Credit goes to www.scribd.com

Scribd
Upload
413 views2 pages

PassThrough Exercises

Sony exported DVD players to the US last year at an exchange rate of 130/$ per player and a price of $150. This year, the exchange rate is 110/$ and price is $170. The degree of pass through is calculated as 73.3%. Volvo exported cars to the US. Between 2001 and 2005, despite the dollar depreciating against the euro, US imports did not decline as much as expected due to exporter pricing practices. Volvo's pass through rate to US customers was calculated as 25.6%. For a BMW exported from Germany to the US, given exchange rates, inflation rates, and a desired 50% pass through rate, the dollar price of the BMW after 1 year

Uploaded by

Dinhphung Le
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
413 views2 pages

PassThrough Exercises

Sony exported DVD players to the US last year at an exchange rate of 130/$ per player and a price of $150. This year, the exchange rate is 110/$ and price is $170. The degree of pass through is calculated as 73.3%. Volvo exported cars to the US. Between 2001 and 2005, despite the dollar depreciating against the euro, US imports did not decline as much as expected due to exporter pricing practices. Volvo's pass through rate to US customers was calculated as 25.6%. For a BMW exported from Germany to the US, given exchange rates, inflation rates, and a desired 50% pass through rate, the dollar price of the BMW after 1 year

Uploaded by

Dinhphung Le
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 2

1. Sony of Japan produces DVD players and exports them to the United States.

Last year the


exchange rate was 130/$ and Sony charged $150 per DVD player. Currently the spot
exchange rate is 110/$ and Sony is charging $170 per DVD player. What is the degree of
pass through by Sony of Japan on their DVD players?

PT= Price Change in terms of importing/ Exchange rate in terms of exporting


Price change (in USD) = [P (1)-P (0)]/P (0) = (170-150)/150=0.1333= 13.33%
Exchange rate change (in JPY) = (S0-S1)/S1=(130-110)/110=0.1818=18.18%
PT= 13.33%/ 18.18%=73.3

2. USD has significantly depreciated against EURO since mid 2001. However, US imports
from Europe did not decline as we expected in response to increasing European costs.
One important reason for this somewhat counterintuitive outcome is the European
exporter’s pricing practices. Many manufacturers and retailers in US did not face a one to
one price increase in their imported product costs. For instance, CIF list price of Volvo
Cross-Country C70 model in September was SKR290,000. In September 2001, at the
prevailing spot rate of USD/SKR 9.35, the dollar cost of the car for the importing dealers
was $34,118 after 10% import duties. With the additional 15% dealer markup, the sticker
price of the car was $39,235. As of May 2005, the CIF cost of the same model (before
10% import duties) was $33,000. Assuming that the dealers pay the same customs duties
and still have a 15% mark-up, and May 2005 exchange rate of USD/SKR 7.45, what is
the pass-through rate by Volvo to its US retail customers? (using CIF to calculate)

 The Volvo price in US dollar in Sep 2001 before the 10% import duties is:
31,016USD
 The new price as of May is $33,000.
 The percentage change in the importing country (USA) currency is
(33,000/31,016)-1= 0.064 or 6.4%
 The change in the value of the exporting country currency SKR is: (9.35-
7.45)/7.45=0.25 or 25%
 The pass-through = 6.4%/25%=0.256 =25.6%
3. Assume that the export price of a BMW- X5 from Germany is EUR 45,000. The
exchange rate is EUR/USD 1.1890. The forecast rate of inflation in the United States is
2.2% per year and is 1% per year in EUR. Use this data to answer the following questions
on exchange rate pass through. (1 mark)
Steps Value
1.
Initial spot exchange rate EUR/USD 1890
Initial price of a BMW-X5 (EUR) EUR45,000
Expected US dollar inflation rate for the coming year 2.200%
Expected Euro inflation rate for the coming year 1.00%
Desired rate of pass through by BMW-X5 50.000%
a) What is the export price for the BMW-X5 at the beginning of the year expressed in U.S.
Dollars?
b) Assuming PPP holds, what should the exchange rate be at the end of the year?
c) Assuming 100% pass-through, what should be the dollar price of an BMW-X5 at the end
one year?
d) Assuming 50% pass-through, what should be the dollar price of an BMW-X5 at the end
one year?

a) PLCo=?
PLCo= So x PFCo= 1.1890 x 45,000= $53,505
b) S1=?

S1= S0 x = 1.1890 x = 1.203

c) 100% pass through= =

% exchange rate charge = = = 1.1775%


100% pass through=> % exchange in price = % exchange in rate charge = 1.1775%

=> = 1.1775% <=> = 1.1775%


=> PLC1 = $54,135.02
d) 50% pass through
100% pass through  1.1775%
50% pass through  ? = 0.58875%

0.58875%= => PLC1’ = 53,820.01

You might also like