Mercedes rises its C300 price
Mercedes rises its C300 price in the U.S from $40,000 to $41,500in response to a movement of the exchange rate from $1.1000/EUR to$1.1600/EUR.
A. What is Mercedes’s percentage exchange rate pass-through inthis case?
B. Please provide four reasons (Key words) to explain whymultinational corporations can survive without a complete exchangerate pass-through.
Answer:
A.) % Change of Exchange Rate = (New Rate – Old Rate)/ Old Rate= (1.16 – 1.1 )/ 1.1 = 5.4545%
% Change in Mercedes Price = (New Rate – Old Rate)/ Old Rate =(41500 – 40000 )/ 40000 = 3.75%
Hence Mercede’s percentage exchange rate pass through = 3.75 /5.4545 = 68.75%
B)
- Already high margins are incorporated in theoriginal cost of Mercedes. Although for a premium product demand isinelastic to price, a very high change in price wight result inconsumers going to the competitor to buy the product. Hence inorder to retain the consumer, companies dont mind to take a smallhit to the margins
- Natural Hedge: Company might be having somedollar expenses which can be fulfilled by dollar revenues. Hencethese expenses act as a natural hedge to some extent
- Forward Contracts: Companies might haveentered into a forward contract if the delivery takes some 1-2months. Hence company can estimate the dollar inflows for whichnecessary hedging instruments might have been entered by thecompany.
- Company might expect the dollar fluctuation not in favour ofthe company might come back the the median levels. Hence companymight have a policy that to a certain extent if the exchange ratemoves, whether in favour or not in favour, no action on the priceswill be taken, post which action might be taken on the price of theproduct.
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