Abstract
We study the relationship between exchange rate pass-through (how exchange rates affect import prices) and exchange rate exposure (how exchange rates affect profits) under flexible prices. We note that the convexity of costs is an important determinant of both pass-through and exposure, and increasing the convexity of costs usually reduce both pass-through and exposure. Hence, if industries differ in their cost function, then one could see a positive correlation between pass-through and exposure across industries. This effect can be mitigated by the negative correlation between pass-through and exposure induced by changes in the price elasticity of demand.