Problem 1 Translation Exposure

Bangkok Instruments, Ltd. (A). Bangkok Instruments, Ltd., the Thai subsidiary of a U.S. corporation, is a seismic instrument manufacturer. Bangkok Instruments manufactures the instruments primarily for the oil and gas industry globallythough with recent commodity price increases of all kinds including copper, its business has begun to grow rapidly. Sales are primarily to multinational companies based in the United States and Europe. Bangkok Instruments balance sheet in thousands of Thai bahts (B) as of March 31 is as follows:

Bangkok Instruments, Ltd. Balance Sheet, March 1, thousands of Thai bahts

Assets		Liabilities and Net Worth
Cash	B24,000	Accounts payable	B18,000
Accounts receivable	36,000	Bank loans	60,000
Inventory	48,000	Common stock	18,000
Net plant and equipment	60,000	Retained earnings	72,000
	B168,000		B168,000

Exchange rates for translating Siam Toys balance sheet into U.S. dollars are:

B40.00/$	April 1st exchange rate after 25% devaluation.
B30.00/$	March 31st exchange rate, before 25% devaluation. All inventory was acquired at this rate.
B20.00/$	Historic exchange rate at which plant and equipment were acquired.

Using the data presented, assume that the Thai baht dropped in value from B30/$ to B40/$ between March 31st and April 1st. Assuming no change in balance sheet accounts between these two days, calculate the gain or loss from translation by both the current rate method and the temporal method. Explain the translation gain or loss in terms of changes in the value of exposed accounts.

Problem 2. Translation Exposure

Bangkok Instruments, Ltd. (B). Using the original data provided for Bangkok Instruments, at the previous problem assume that the Thai baht appreciated in value from B30/$ to B25/$ between March 31 and April 1. Assuming no change in balance sheet accounts between those two days, calculate the gain or loss from translation by both the current rate method and the temporal method. Explain the translation gain or loss in terms of changes in the value of exposed accounts.

Problem 3. Operating Exposure

Manitowoc Crane (A). Manitowoc Crane (U.S.) exports heavy crane equipment to several Chinese dock facilities. Sales are currently 10,000 units per year at the yuan equivalent of $24,000 each. The Chinese yuan (renminbi) has been trading at Yuan8.20/$, but a Hong Kong advisory service predicts the renminbi will drop in value next week to Yuan9.00/$, after which it will remain unchanged for at least a decade. Accepting this forecast as a given, Manitowoc Crane must make a pricing decision in the face of the impending devaluation. It may either (1) maintain the same yuan price and in effect sell for fewer dollars, in which case Chinese volume will not change; or (2) maintain the same dollar price, raise the yuan price in China to offset the devaluation, and experience a 10% drop in unit volume. Direct costs are 75% of the U.S. sales price.

1. What would be the short-run (one-year) impact of each pricing strategy?
2. Which do you recommend?

Problem 4. Operating Exposure

Hurte-Paroxysm Products, Inc. (A). Hurte-Paroxysm Products, Inc. (HP) of the United States exports computer printers to Brazil, whose currency, the reais (R$), has been trading at R$3.40/US$. Exports to Brazil are currently 50,000 printers per year at the reais-equivalent of $200 each. A rumor exists that the reais will be devalued to R$4.00/$ within two weeks by the Brazilian government. Should the devaluation take place, the reais is expected to remain unchanged for another decade.

Accepting this forecast as given, HP faces a pricing decision that must be made before any actual devaluation: HP may either (1) maintain the same reais price and, in effect, sell for fewer dollars, in which case Brazilian volume will not change, or (2) maintain the same dollar price, raise the reais price in Brazil to compensate for the devaluation, and experience a 20% drop in volume. Direct costs in the United States are 60% of the U.S. sales price. What would be the short-run (1-year) implication of each pricing strategy? Which do you recommend?