Question
In: Finance
In Japan, Honda’s export price per vehicle, FOB Yokohama, was ¥4,000,000 at a time when the...
In Japan, Honda’s export price per vehicle, FOB Yokohama, was ¥4,000,000 at a time when the exchange rate was ¥103/$. The expected rate of inflation in Japanese yen for the coming year was 1%; the expected rate of inflation in U.S. dollar markets 4.0%. Honda actively tried to limit pass through of exchange rate changes into prices to 75% of annual changes. Assuming 75% pass through of exchange rate changes, what would the price of a Honda be at the end of the coming year in U.S. dollars?
Solutions
Expert Solution
| Spot rate | = | Yen 103/$ | |||||||||
| 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 | |||||||||||
| Please upvote the answer | |||||||||||
| If you have any doubt,please ask | |||||||||||
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