Question

In Japan, suppose Honda’s export price per vehicle is ¥4,000,000 and that the exchange rate is ¥125/$. The one-year Japanese yen interest rate is 1.0%; the one-year U.S. interest rate is 3.0%. Assume that International Fisher holds. Assuming a 60% 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

Answer:$31,379

Explanation:Applying the

Fishers international effect

1+Ic/1+Ib=S1/S0

Where Ib represents the interest rate in base country which is Japan in this case

Ic represents the interest rate in counter country in this case,US

S0 is the base spot rate or exchange rate at the moment while S1 is the spot rate at the end of the coming year

Ic =3%=0.03

Ib=1%=0.01

So=145

Substituting in the formula

1.03/1.01=S1/125

Cross multiplying

S1=125(1.03)/1.01=127.475

So price in US at spot 127.475 will be ¥4,000,000/127.475=$31,379