Question

Your company has a pass-through policy of 50%. Assuming that you are an exporter and that your local sales price in the Eurozone is EUR 5.00 per unit of output, what is your new sales price if the EUR depreciates by 15% relative to the USD?

Answer 1

50% passthrough means for every 1% change in exchange rate , price would change by 0.5%

Lets say earlier EUR had exchange rate of 1 USD/EUR. After depreciation, exchange rate becomes 0.85 USD/EUR

New Price=(1+change in exchange rate of USD*pass through percentage)*Original Price=(1+(1/0.85-1)*0.5)*5=5.441

So, new price is 5.441 EUR

Alternatively:

New Price=(1+change in exchange rate of EUR*pass through percentage)*Original Price=(1+15%*0.5)*5=5.375

So, new price is 5.375 EUR