BLADES, INC. CASE Assessment of Future Exchange Rate Movements As the chief financial officer of Blades, Inc., Ben Holt is 1. How are percentage changes in a currency's value pleased that his current system of exporting "Speedos" measured? Illustrate your answer numerically by to Thailand seems to be working well. Blades' primary assuming a change in the Thai baht's value from a customer in Thailand, a retailer called Entertainment value of S.022 to 5.026. Products, has committed itself to purchasing a fixed 2. What are the basic factors that determine the value number of Speedos annually for the next three years of a currency? In equilibrium, what is the relationship at a fixed price denominated in baht, Thailand's cur- nd's cur- between these factors? rency. Furthermore, Blades is using a Thai supplier for some of the components needed to manufacture 3. How might the relatively high levels of inflation Speedos. Nevertheless, Holt is concerned about recent and interest rates in Thailand affect the baht's value? developments in Asia. Foreign investors from various (Assume a constant level of U.S. Inflation and interest countries had invested heavily in Thailand to take rates.) advantage of the high interest rates there. As a result 4. How do you think the loss of confidence in the of the weak economy in Thailand, however, many for Thai baht, evidenced by the withdrawal of funds from eign investors have lost confidence in Thailand and Thailand, will affect the baht's value? Would Blades be have withdrawn their funds. affected by the change in value, given the primary Thai Holt has two major concerns regarding these customer's commitment? evelopments. First, he is wondering how these 5. Assume that Thailand's central bank wishes to changes in Thailand's economy could affect the prevent a withdrawal of funds from its country in order value of the Thai baht and, consequently, Blades. to prevent further changes in the currency's value. How More specifically, he is wondering whether the could it accomplish this objective using interest rates? effects on the Thai baht may affect Blades even though its primary Thai customer is committed to 6. Construct a spreadsheet illustrating the steps Blades over the next three years. Blades' treasurer would need to follow in order to Second, Holt believes that Blades may be able to speculate on expected movements in the baht's value speculate on the anticipated movement of the baht, over the next 30 days. Also show the speculative profit but he is uncertain about the procedure needed to (in dollars) resulting from each scenario. Use both of accomplish this. To facilitate Holt's understanding of Holt's examples to illustrate possible speculation. exchange rate speculation, he has asked you, Blades Assume that Blades can borrow either $10 million or financial analyst, to provide him with detailed illustra- the baht equivalent of this amount. Furthermore, tions of two scenarios. In the first, the baht would assume that the following short-term interest rates move from a current level of 5.022 to S.020 within (annualized) are available to Blades: the next 30 days. Under the second scenario, the baht LENDING B ORROWING would move from its current level to $.025 within the CURRENCY RATE RATE next 30 days. Based on Holt's needs, he has provided you with the Dollars 8.10% 8. 20% following list of questions to be answered: Thai baht 14.80% 15.40%
