GXC Corp is a U.S. manufacturer of scientific instruments. GXC’s sales are entirely in the Eurozone. GXC’s selling price per instrument is currently €100. GXC expects a sales volume of 2,000 instruments. GXC sources components from the Eurozone. The cost of the components is fixed in euros. For each instrument, the components cost is €20. Other variable production costs, incurred in the assembly of the instrument in the U.S., are $25 per instrument. The fixed operating costs are $50,000. Assume today’s spot FX rate is 1.25$/€ and the euro were to depreciation by 10%.

(1) Find GXC’s optimal FX pass-through policy, assuming that sales volume changes when price changes, and GXC has no competitor.

(2) Assume the price elasticity of demand for GXC’s product is 1.5. Find the operating exposure based on the optimal pass through rate in question (1).