Question

Describe how a change in the exchange rate affected your firm. Explain what happened to your price and quantity. How can you profit from future shifts in the exchange rate? How do you predict future changes in the exchange rate?

Answer 1

The above question can be solved assuming that the economy in which the firm operates is an open economy and export - import takes place.

So in that case due to changes in exchnage rate our currency can appreciate or depreciate. With the appreciation and depreciation the sale of product is is affected which further leads to determining the price and quantity to produce.

Suppose the currency depreciate, then the global market will find our product cheaper and will demand higher. This will increase the sales hence the quantity will incease in short term. But the determine the equlibrium the price will also increase to cater to the rising demand.

Sme way when the currency depreciates, the global market will find our product to be more expensive, hence the demand will go down, which will lead to decrease in sales so the quantity will decrease and the price will also decrease so the new equlibrium is mantained.

We can make profits by predicting the exchange rate. When the economy is doing good and the ther is investments in the country like FII, FDI etc then the currency appreciates. during that time the firm should hedge te losses of low demand by getting into forward/ future contracts where they can get the agreement done to sell certain quantity at certain price which will be fixed.

Same way when the firm thinks that the currency will depreciate then the firm should keep the inventory ready so that they can cater to the increasing demand smoothly without any capacity constraint.