Question

In japan, honda's export price is yen 3million. spot rate is yen100/$ suppose suddenly the rate changes to yen90/$. Assuming 60% exchange rate pass-thru, what should be the price of Honda in U.S. in $? Show work please.

A)$33,000

B)$33,333

C) $31,999

D) $31,333

E) Need more information

Answer 1

Export Price of Honda (JPY) = 3,000,000 JPY

Current Exchange Rate USD/JPY = 100

Original Import Price (USD) = 3,000,000 / 100 = $ 30,000

Hence, original import price in US is $ 30,000

Now, when the JPY appreciates to USD/JPY = 90 then, the price of Honda in USD changes as given below:

Export Price (JPY) = 3,000,000 JPY

Revised Exchange Rate USD/JPY = 90

Revised Import Price (USD) = 3,000,000 / 90 = $ 33,333

Hence, the revised import price in US is $ 33,333

The increase in import price in USD can be calculated as: Revised Import Price – Original Import Price

Increase in Import Price (USD) = 33,333 – 30,000

Increase in Import Price (USD) = $ 3,333

As given, 60% exchange rate pass through means that 60% of the price increase will be passed on and the balance 40% will be absorbed by Honda.

Increase in Import Price passed on = 60% * Increase in Import Price

Increase in Import Price passed on = 60% * 3,333

Increase in Import Price passed on = $ 1,999

Price of Honda in US = Original Import Price + Increase in Import Price passed on

Price of Honda in US = $ 30,000 + $ 1,999

Price of Honda in US = $ 31,999

Hence, the Price of Honda in US will be USD 31,999.