Question

BMW raises its 328i price in the U.S. from​ $41,000 to​ $42,900 in response to a movement of the exchange rate from​ $1.1200/€ to​ $1.1900/€.    a.​ What’s BMW’s percentage exchange rate​ pass-through in this​ case? b. Please provide four reasons​ (key words) to explain why multinational corporations can survive without a complete exchange rate​ pass-through.

Answer 1

a. Exchange rate pass through measures the responsiveness of prices of international products to change in exchange rates. We need to understand what is the change in price brought about by the change in exchange rates.

The % change in price = ((42900-41000)/41000) *100 = 4.63%

The % change in exchange rates = ((1.1900-1.1200)/1.1200)*100 = 6.25 %

Exchange rate pass through = 4.63/6.25 % = 0.74 %

For every 1% change in exchange rates there is a 0.74% change in the price of the product.

b. MNC's can survive without a complete pass through by hedging operating exposure, increasing competitiveness, using extensive margins (which is incorporated in the product price before hand) , making prompt payments before an aggressive movement in the currency.