Title: Foreign exchange volatility and international pricing

Authors: Tantatape Brahmasrene, Jui-Chi Huang

Addresses: College of Business, Purdue University North Central, Westville, IN 46391-9528, USA. ' Division of Engineering, Business, and Computing, Pennsylvania State University Berks Campus, Reading, PA 19610, USA

Abstract: This paper explores the hypothesis that the unresponsiveness of export pricing to exchange rate fluctuations may be partially the result of hedging activities by trading agents due to foreign exchange volatility (EV) to eliminate exchange risk. In essence, hedging against foreign exchange uncertainty affects the structure of pass-through relationship. The exchange rate pass-through issue is governed by a firm-specific factor like hedging, in addition to market share, product differentiation and market structure. A reduction in exchange risk exposure leads to a decline in the willingness rather than the ability to pass the cost shock to consumers. The estimation of foreign EV dummy interacting with one-year-lagged exchange rate on export pricing supports the hypothesis that there is a significant differential impact of high- and low-EV destinations on the degree of pass-through which, in turn, affects international pricing.

Keywords: foreign exchanges; hedging; pass-through; international pricing; export prices; unresponsiveness; exchange rate fluctuations; exchange rates; trading agents; exchange risk; uncertainty; firm-specific factors; market share; product differentiation; market structure; risk exposure; cost shock; consumers; one-year exchange rates; dummy interacting; lagged exchange rates; differential impacts; high-exchange volatility; low-exchange volatility; economics; business research.

DOI: 10.1504/IJEBR.2011.040949

International Journal of Economics and Business Research, 2011 Vol.3 No.4, pp.357 - 370

Published online: 22 Apr 2015 *

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