Exchange Rate Price Response Optimization
Economic Science Institute, Chapman University
Oracle Principal Investigator
Exchange rates fluctuations are large and persistent. For example, a dollar of sales revenue in the U.S. for a Japanese firm yielded 51% more yen in January 2015 than it did in September 2012. One dollar of sales revenue for a European firm yielded 27.7% more euros in the first week of March 2015 than it did in the first week of July 2014. The impact of exchange rate movements on product prices in international trade is large, but price movements don’t fully reflect exchange rate movements.
Exchange rate fluctuations can lead to dramatic changes in profit margins for companies. Companies need to be ready to respond to large fluctuations by changing pricing and procurement. This research will analyze exchange rate fluctuations to determine how large fluctuations should be and how long they should last before adjustments in pricing or procurement should be made. This research will develop approaches for optimally adjusting pricing and procurement accounting for the effects of price fluctuations on consumers, competitors, and suppliers.
This research will also help us to understand how businesses should respond to other broad-based types of cost changes. Examples of other types of broad-based cost changes that could occur would be a change in the price of oil or a large change in labor costs because of changes in the minimum wage or other mandated benefits.