a. Market Share Vs Profit Margin:

In the wake of a rising dollar, a US firm selling overseas or competing at home against foreign imports faces a Hobson’s choice: Does it keep its dollar price constant to preserve its profit margin & thereby, lose sales volume, or does it cut its dollar price to maintain market share & thereby, suffer a reduced profit margin? Conversely, does the firm use a weaker dollar to regain ground lost to foreign competitors or does it use the weak dollar to raise prices & recoup losses incurred from the strong dollar?

To begin the analysis, a firm selling overseas should follow the standard economic proposition of setting the price that maximizes dollar profits (by equating marginal revenues & marginal costs) .n making this determination, however, profits should be translated using the forward exchange rate that reflects the true expected dollar value of the receipts upon collection.

Following appreciation of the dollar, this is equivalent to foreign currency (FC) depreciation; a firm selling overseas should consider opportunities to increase the FC prices of its products. The problem, of course, is that local producers now will have a competitive cost advantage, limiting an exporter’s ability to recoup dollar profits by raising FC selling prices.