Question

Ranbaxy, an​ India-based pharmaceutical​ firm, has continuing problems with its cholesterol reduction​ product's price in one of its rapidly growing​ markets, Brazil. All product is produced in​ India, with costs and pricing initially stated in Indian rupees​ (Rps), but converted to Brazilian reais​ (R$) for distribution and sale in Brazil. In​ 2009, the unit volume was priced at Rps22,400​, with a Brazilian real price set at R$887.

But in​ 2010, the real appreciated in value versus the​ rupee, averaging Rps 26.64/R$. In order to preserve the real price and product profit margin in​ rupees, what should the new rupee price be set​ at?

Answer 1

The price of one country's currency when expressed in other country's currency is known as exchange rate.

original cholesterol unit price rupees (INR) = 22,400

original price for distribution and sale = 887

Average spot rate for 2010 = 26.64

Implied original spot rate, Indian rupees per Brazilian reais = original cholesterol unit price / original price for distribution and sale

= 22400 / 887

= 25.25

Assuming that Ranbaxy wishes to preserve the Brazilian reais price for competitiveness, the same Brazilian reais price must be converted back into indian rupees with a new spot exchange rate in rupees per reais.

Recalculated Indian rupee price of product = Original reais price * avg spot rate for 2010

= 887 * 26.64

= 23,629.7

The Indian rupee price is higher than it was the previous year as the Indian rupee depreciated in value against the Brazilian reais. This would imply that Ranbaxy could retain the same Brazilian reais price and enjoy the larger profit in Indian rupees.

All the best

cheers...!!