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?

Solutions

Expert Solution

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.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

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

Exchange rate pass-through (the impact that a devaluation in the exchange rate is passed through to...

Exchange rate pass-through (the impact that a devaluation in the exchange rate is passed through to the price of imports) is lower in less developed countries than more developed ones. What does this imply about the degree of competition in these markets?

What does “exchange rate pass-through” mean? When the TLdepreciates, explain how it leads to an...

What does “exchange rate pass-through” mean? When the TL depreciates, explain how it leads to an increase in inflation and interest rates.

Exchange Rate Pass-through: I have read about a study by Gopinath, Itskhoki, and Rigobon (2010) about...

Exchange Rate Pass-through: I have read about a study by Gopinath, Itskhoki, and Rigobon (2010) about the currency which importers decide to price their goods in. The study suggests that if an importer wants low passthrough rate (e.g. 0-20%), it will price in USD. If an importer wants high passthrough rate (e.g. 100%), it will price in non-Dollar curencies. Can someone explain why an importer would want 100% passthrough versus 0% passthrough? How does this impact an importer choosing to...

Explain how the forward exchange rate can be used for hedging using the forward exchange market....

Explain how the forward exchange rate can be used for hedging using the forward exchange market. Use realistic numerical examples to illustrate your answer. Use the dollar per euro exchange rate as the basis for your answer.

2.) Define pass-through taxation. What business entities have pass-through taxation? 3.) What is the benefit of...

2.) Define pass-through taxation. What business entities have pass-through taxation? 3.) What is the benefit of a corporation electing to be taxed as a S-corporation? What are the limitations of a company making this election. 4.) What factors affect the tax treatment of corporate distributions? 5.) A corporation currently has income solely generated within the United States. However, next year the corporation plans to extend into foreign markets. What tax issues may arise?

Four main schools of thought exist as to the relevance of exchange rate risk. The Multinational...

Four main schools of thought exist as to the relevance of exchange rate risk. The Multinational Corporation's treatment of exchange rate risk is a result of their thoughts on exchange rate risk. Discuss the thoughts surrounding exchange rate risks and the MNC's response to these arguments.

1. For food to pass into the stomach, it needs to pass through two sphincters. What...

1. For food to pass into the stomach, it needs to pass through two sphincters. What are these two, What is the function of the second one (as in, the second sphincter the food would go through)? If this sphincter does not function properly, what medical issue could result?

Which of the following hedging techniques insulates a firm from adverse exchange rate movements, and yet...

Which of the following hedging techniques insulates a firm from adverse exchange rate movements, and yet allow the firm to benefit from favorable movement? A. forward hedge B. futures hedge C. option hedge D. money market hedge E. all of the above

What is a hash and what is its relevance to passwords?

Subjects