2. Currency risk in the travel industry (intermediate). Kuoni, a leading Swiss tour operator, sells package tours to Sri Lanka for French and Swiss tourists.

On January 1, 2012, Kuoni sent its printed catalog to French, Belgian, and Swiss travel agencies quoting prices of €7,500 and CHF 10,000, respectively, valid throughout 2012 on their fortnight package tours to Sri Lanka. The cost incurred by Kuoni, on a unit basis, is distributed as follows: CHF 5,200 for administrative and travel costs and SLR 13,000 (Sri Lankan rupees) for residential costs. The exchange rate is SLR 10 to CHF 1.

On August 15, 2012, the Swiss franc is revalued by 15 percent vis-à-vis the euro. However, because of earlier booking, the CHF revaluation cannot be passed through before January 1, 2013.

a. Assuming that Kuoni sells 500 trips every 15 days evenly divided between France and Switzerland, assess the impact of the Swiss franc revaluation upon the profitability of Kuoni in 2012.

b. On March 30, 2012, an inflationary wage settlement in Sri Lanka results in an increase of 25 percent in the SLR cost of residential expenses that takes effect immediately. Assuming that the French demand for such services is characterized by a price elasticity of 1.5 and an income elasticity of 2, assess the impact of fully passing through the CHF revaluation in a year in which the French real national income is expected to increase by 8 percent.