Free Exchange Rate Essay Sample

The essay is a critical examination of the concept of exchange rate pass through and its effect on rates of inflation as well as monetary policy within a given country. The term, exchange rate pass-through has been thought to refer to the degree of sensitivity of import prices to 1% change in exchange rates in the currency of the country that is importing goods or services.

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Another term closely associated with exchange rate pass through is pricing-to-market; a way of pricing by organizations that export their goods to a destination market after a change in the exchange rate. There are three types of exchange rate pass through, complete (import prices change in equal proportion as exchange rate), zero (occurs when exporters change prices in their own currencies by a proportion equivalent to exchange rate change but in the opposite direction) and partial or incomplete (occurs when exporters modify export prices in their own currencies by a proportion much less than the change in exchange rate).

According to Campa & Goldberg, 2005 there are various determinants of exchange rate pass-through and they include; size of the export market, nature of competition the exporting firms face, a nation monetary and exchange rate policy, the magnitude, time and direction of exchange rate among other. The concept does have profound effect on import prices as compared to consumer price index.

In regards to writing an option, despite the knowledge that the gain from receiving the option premium is fixed but the loss if the underlying price goes in the wrong direction can be extremely large two things would definitely happen; the option is not exercised and it being exercised. In the former case the writer will gain the option premium while still having the original stock. Similarly, if the option is exercised the writer gains the premium as well as experience an opportunity loss. The loss is not in terms of cash but a loss of not making a more profitable option in the case where the stock could have been sold at a better price.


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