Blades Inc. Case

Decisions to Use International Financial Markets

As a financial analyst for Blades, Inc., you are reason$-$ably satisfied with Blades' current setup of exporting

"Speedos" $($roller blades$)$ to Thailand. Due to the unique arrangement with Blades' primary customer in

Thailand, forecasting the revenue to be generated there is a relatively easy task. Specifically, your customer

has agreed to purchase $180,000$ pairs of Speedos annually, for a period of $3$ years, at a price of THB$4,594$

$($THB $14$ Thai baht$)$ per pair. The current direct quotation of the dollar$-$baht exchange rate is $$\mathrm{.}024.$

The cost of goods sold incurred in Thailand $($due to imports of the rubber and plastic components from

Thailand$)$ runs at approximately THB$2,871$ per pair of Speedos, but Blades currently only imports materials

sufficient to manufacture about $72,000$ pairs of Speedos. Blades' primary reasons for using a Thai sup$-$ plier

are the high quality of the components and the low cost, which has been facilitated by a continuing

depreciation of the Thai baht against the U$.$S$.$ dollar. If the dollar cost of buying components becomes more

expensive in Thailand than in the United States, Blades is contemplating providing its U$.$S$.$ supplier with the

additional business. Your plan is quite simple; Blades is currently using its Thai$-$denominated revenues to

cover the cost of goods sold incurred there. During the last year, excess revenue was converted to U$.$S$.$

dollars at the prevailing exchange rate. Although your cost of goods sold is not fixed contractually as the

Thai revenues are, you expect them to remain relatively constant in the near future. Consequently, the

baht$-$denominated cash inflows are fairly predictable each year because the Thai customer has committed to

the purchase of $180,000$ pairs of Speedos at a fixed price. The excess dollar revenue resulting from the

conversion of baht is used either to support the U$.$S$.$ production of Speedos if needed or to invest in the

United States. Specifically, the revenues are used to cover the cost of goods sold in the U$.$S$.$ manufacturing

plant, located in Omaha, Nebraska.

Ben Holt, Blades' CFO, notices that Thailand's interest rates are approximately $15$ percent $($versus $8$ percent

in the United States$).$ You interpret the high interest rates in Thailand as an indication of the uncertainty

resulting from Thailand's unstable econ$-$ omy. Holt asks you to assess the feasibility of investing Blades'

excess funds from Thailand operations in Thai$-$ land at an interest rate of $15$ percent. After you express your

opposition to his plan, Holt asks you to detail the reasons in a detailed report.

Construct a spreadsheet to compare the cash flows resulting from two plans. Under the first plan, net

baht$-$denominated cash flows $($received today$)$ will be invested in Thailand at $15$ percent for a $1-$year period,

after which the baht will be converted to dollars. The expected spot rate for the baht in $1$ year is about $$\mathrm{.}022$

$($Ben Holt's plan$).$ Under the second plan, net baht$-$ denominated cash flows are converted to dollars

immediately and invested in the United States for $1$ year at $8$ percent. For this question, assume that all

baht$-$denominated cash flows are due today. Does Holt's plan seem superior in terms of dollar cash flows

available after $1$ year? Compare the choice of investing the funds versus using the funds to provide needed

financing to the firm.