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Assessment of Future Exchange Rate Movements As the chief financial officer of Blades, Inc., Ben Holt is affect Blades even though its primary Thai customer pleased that his current system of exporting "Speedos" is committed to Blades over the next 3 years. to Thailand seems to be working well. Blades' primary Second, Holt believes that Blades may be able to customer in Thailand, a retailer called Entertainment speculate on the anticipated movement of the baht, but Products, has committed itself to purchasing a fixed he is uncertain about the procedure needed to accomnumber of Speedos annually for the next 3 years at a plishlthis. To facilitate Holt's understanding of exchange fixed price denominated in baht, Thailand's currency. rate speculation, he has asked you, Blades' financial anaFurthermore, Blades is using a Thai supplier for some lyst, to provide him with detailed illustrations of two of the components needed to manufacture Speedos. scenarios. In the first, the baht would move from a curNevertheless, Holt is concerned about recent develop- rent level of $.022 to $.020 within the next 30 days. ments in Asia. Foreign investors from various countries Under the second scenario, the baht would move from had invested heavily in Thailand to take advantage of its current level to $.025 within the next 30 days. the high interest rates there. As a result of the weak Based on Holt's needs, he has provided you with the economy in Thailand, however, many foreign investors following list of questions to be answered: have lost confidence in Thailand and have withdrawn their funds. 1. How are percentage changes in a currency's value Holt has two major concerns regarding these devel- measured? Illustrate your answer numerically by opments. First, he is wondering how these changes in assuming a change in the Thai baht's value from a Thailand's economy could affect the value of the Thai value of $.022 to $.026. baht and, consequently, Blades. More specifically, he is 2. What are the basic factors that determine the value wondering whether the effects on the Thai baht may of a currency? In equilibrium, what is the relationship between these factors? Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Chapter 4: Exchange Rate Determination 133 3. How might the relatively high levels of inflation and speculate on expected movements in the baht's value interest rates in Thailand affect the baht's value. (Assume over the next 30 days. Also show the speculative profit a constant level of U.S. inflation and interest rates.) (in dollars) resulting from each scenario. Use both of 4. How do you think the loss of confidence in the Holt's examples to illustrate possible speculation. Thai baht, evidenced by the withdrawal of funds from Assume that Blades can borrow either $10 million or Thailand, will affect the baht's value? Would Blades be the baht equivalent of this amount. Furthermore, affected by the change in value, given the primary Thai assume that the following short-term interest rates customer's commitment? (annualized) are available to Blades: 5. 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? 6. Construct a spreadsheet illustrating the steps Blades' treasurer would need to follow in onder