International Financial Management

Topics: United States dollar, Currency, Price elasticity of demand Pages: 1 (296 words) Published: January 27, 2013
Jesalaine S. Templo
1.Which do you believe is the most important for sustaining the sale of new carrera model, maintaining a profit margin or maintaining the U.S. dollar price? To answer this question, the price elasticity of demand must be known for the Porsche Carrera. If the car is relatively inelastic, the company can count on high exchange rate pass-through. Meaning, that the Porsche may keep the profit margin by increasing the price of the car as the U.S. dollar weakens in relationship to the Euro. If the car has elastic demand, meaning that price elasticity is less than 1, the car maker will have to reduce margin in order to keep price constant in order to achieve sales. We suspect that Porsche cars are relatively price inelastic because they are a luxury good. Porsche should maintain profit margin. 2.Given the change in exchange rates and the strategy employed by porsche, would you say that purchasing power of U.S. dollar customer has grownstronger or weaker? Purchasing power of the U.S. dollar as observed from the price of the Porsche Carrera has grown weaker between the months of July and December. This can be observed by looking at the trend in change of the spot exchange rate. (Reference Figure 1 & Figure 2) The spot exchange rate as based on the product price is defined as price in U.S. dollars divided by price in Euros. As the price goes up in U.S. dollars and the price stays constant in Euros, this means that it requires more dollars to buy the same product, or that the dollar has grown weaker. 3.In the long run, what do most automobile manufacturers do to avoid this large exhange rate squeezes?
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