Blades, Inc. Case Assessment of Exchange Rate Exposure Blades, Inc., is currently exporting roller blades to Thailand and importing certain components needed to manufacture roller blades from that country. Under a fixed contractual agreement, Blades primary customer in Thailand has committed itself to purchase pairs of roller blades annually at a fixed price of Thai baht (THB) per pair. Blades is importing rubber and plastic components from various suppliers in Thailand at a cost of approximately per pair, although the exact price (in baht) depends on current market prices. Blades imports materials sufficient to manufacture pairs of roller blades from Thailand each year. The decision to import materials from Thailand was reached because the rubber and plastic components that are needed to manufacture Blades products and that are supplied by Thai firms are inexpensive, yet of high quality. Blades also has conducted business with a Japanese supplier in the past. Although Blades analysis indicates that the Japanese components are of a lower quality than the corresponding Thai components, Blades has occasionally imported components from Japan when the prices were low enough. Currently, Ben Holt, Blades chief financial officer (CFO), is considering importing components from Japan more frequently. Specifically, he would like to reduce Blades baht exposure by taking advantage of the recently high correlation between the baht and the yen . Because Blades has net inflows denominated in baht and would have outflows denominated in yen, its net transaction exposure would be reduced if these two currencies were highly correlated. If Blades decides to import components from Japan, it would probably import materials sufficient to manufacture pairs of roller blades annually at a price of per pair. Holt is also contemplating further expansion into foreign countries. Although he would eventually like to establish a subsidiary or acquire an existing business overseas, his immediate focus is on increasing Blades foreign sales. Holts primary reason for developing this plan is that the profit margin from Blades imports and exports exceeds percent, whereas the profit margin from Blades domestic production is less than percent. Consequently, he believes that further foreign expansion will be beneficial to the companys future. Although Blades current exporting and importing practices have been profitable, Holt is contemplating extending Blades trade relationships to countries in different regions of the world. One reason for this decision is that various Thai roller blades manufacturers have recently established subsidiaries in the United States. Furthermore, various Thai roller blades manufacturers have recently targeted the U.S. market by advertising their products over the Internet. As a result of this increased competition from Thailand, Blades is uncertain whether its primary customer in Thailand will renew the current commitment to purchase a fixed number of roller blades annually. The current agreement will terminate in three years. Another reason for engaging in transactions with other, non-Asian countries is that the Thai baht has depreciated substantially recently, which has somewhat reduced Blades profit margins. The sale of roller blades to other countries with more stable currencies may increase Blades profit margins. Although Blades will continue exporting to Thailand under the current agreement for the next two years, it may also export roller blades to Jogs, Ltd., a British retailer. Preliminary negotiations indicate that Jogs would be willing to commit itself to purchase pairs of Speedos, Blades primary product, for a fixed price of per pair. Holt is aware that further expansion would increase Blades exposure to exchange rate fluctuations, but he believes that Blades can supplement its profit margins by expanding. He is vaguely familiar with the different types of exchange rate exposure, but has asked you, a financial analyst at Blades, Inc., to help him assess how the contemplated changes would affect Blades financial position. Among other concerns, Holt is aware that recent economic problems in the region have had an effect on Thailand and on other Asian countries. Although the correlation between Asian currencies such as the Japanese yen and the Thai baht is generally not very high and very unstable, these recent problems have increased the correlation among most Asian currencies. In contrast, the correlation between the British pound and the Asian currencies is quite low.

What type(s) of exposure (transaction, economic, or translation exposure) is Blades subject to? Why?