7. What is the “exchange rate pass through”? What is its relevance for hedging?

7. What is the “exchange rate pass through”? What is its relevance for hedging?

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Answer-

The Exchange rate pass-through (ERPT) is the measure of responsiveness of trade prices in local currency to unit change in exchange rate.
It is also decsribed as the extent to which the prices of imported and exported goods change as a result of change in exchange rates of the countries dealing with transaction.

The hedging is done to nullify the fluctuations in the exchange rate between currencies. The hedging allows the exporting and importing nations to hedge currencies to avoid fluctuations which can cause losses to either parties involved in trade. The hedging allows to avoid the adverse effects of currency fluctuations which will impact the financial health of the company.

When the currency of home country appreciates exports bocomes expensive and the sales are likely to decline, and if the exporter does not act or respond to the increase in price the exchange pass trough is 100 % or complete and if the absorbs part of the price increase the exchange pass through is partial or is incomplete.

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