Question

In Japan, Honda’s export price per vehicle, FOB Yokohama, was ¥4,000,000 at a time when the exchange rate was ¥103/$. The expected rate of inflation in Japanese yen for the coming year was 1%; the expected rate of inflation in U.S. dollar markets 4.0%. Honda actively tried to limit pass through of exchange rate changes into prices to 75% of annual changes. Assuming 75% pass through of exchange rate changes, what would the price of a Honda be at the end of the coming year in U.S. dollars?

Answer 1

	Spot rate		=	Yen 103/$
Current price of Yokohama in Usd			=	Price/exchange rate
			=	4,000,000/103
			=	$ 38,834.95
As per interest rate parity
		Forwardrate		=	Spotrate*(1+int rate in Japan)/(1+int rate in US)
		Forwardrate		=	103*(1+0.01/1+0.04)
		Forwardrate		=	103*(1.01/1.04)
		Forwardrate		=	103*0.9712
		Forwardrate		=	Yen 100.03/$
Expected price of yokohama in USD after 1 year (without passthrough)			=	4,000,000/100.03
			=	$                                                  39,988.00
	change in price		=	Price after 1 year-price today
			=	$39,988.36-$38,834.95
			=	$                                                    1,153.41
Actual effect of this price change passed through					=	Price change*pass through %
					=	$1,153.41*75%
					=	$                             865.06
	Expected price of yokohama after 1 year in USD				=	Current price in USD+ actual effect of passthrough on pricechange
					=	$38834.95+$865.06
					=	$                       39,700.01
		There may be little differencedue to decimal places
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