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
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