BLADES, INC. CASE

Assessment of Future Exchange Rate Movements

As the chief financial officer of Blades, Inc., Ben Holt is pleased that his current system of exporting "Speedos" to Thailand seems to be working well. Blades' primary customer in Thailand, a retailer called Entertainment Products, has committed itself to purchasing a fixed number of Speedos annually for the next three years at a fixed price denominated in baht, Thailand's currency. Furthermore, Blades is using a Thai supplier for some of the components needed to manufacture Speedos. Nevertheless, Holt is concerned about recent developments in Asia. Foreign investors from various countries had invested heavily in Thailand to take advantage of the high interest rates there. As a result of the weak economy in Thailand, however, many foreign investors have lost confidence in Thailand and have withdrawn their funds.

Holt has two major concerns regarding these developments. First, he is wondering how these changes in Thailand's economy could affect the value of the Thai baht and, consequently, Blades. More specifically, he is wondering whether the effects on the Thai baht may affect Blades even hough its primary Thai customer is committed to lades over the next three years.

Second, Holt believes that Blades may be able to peculate on the anticipated movement of the baht, he is uncertain about the procedure needed to complish this. To facilitate Holt's understanding of change rate speculation, he has asked you, Blades' ancial analyst, to provide him with detailed illustrans of two scenarios. In the first, the baht would ve from a current level of $$\mathrm{.}022$ to $$\mathrm{.}020$ within next $30$ days. Under the second scenario, the baht Id move from its current level to $$\mathrm{.}025$ within the $30$ days.

ased on Holt's needs, he has provided you with the wing list of questions to be answered:

How are percentage changes in a currency's value measured? Illustrate your answer numerically by assuming a change in the Thai baht's value from a value of $$\mathrm{.}022$ to $$\mathrm{.}026.$

What are the basic factors that determine the value of a currency? In equilibrium, what is the relationship between these factors?

How might the relatively high levels of inflation and interest rates in Thailand affect the baht's value?. $($Assume a constant level of U$.$S$.$ inflation and interest rates.$)$

How do you think the loss of confidence in the Thai baht, evidenced by the withdrawal of funds from Thailand, will affect the baht's value? Would Blades be affected by the change in value, given the primary Thai customer's commitment?

Assume that Thailand's central bank wishes to prevent a withdrawal of funds from its country in order to prevent further changes in the currency's value. How could it accomplish this objective using interest rates?

Construct a spreadsheet illustrating the steps Blades' treasurer would need to follow in order to speculate on expected movements in the baht's value over the next $30$ days. Also show the speculative profit $($in dollars$)$ resulting from each scenario. Use both of Holt's examples to illustrate possible speculation. Assume that Blades can borrow either $$10$ million or the baht equivalent of this amount. Furthermore, assume that the following short$-$term interest rates $($annualized$)$ are available to Blades:

$\backslash$table$[[$CURRENCY$,\backslash$table$[[$LENDING$],[$RATE$]],\backslash$table$[[$BORROWING$],[$RATE$]]],[$Dollars$,8\mathrm{.}10\%,8\mathrm{.}20\%$