question 6? (the case is written in photo 1)
Case study: Aussie Blades, Pty Ltd Assessment of future exchange rate movements As the chief financial officer of Aussie Blades, Pty Ltd, Ben Holt is pleased that his current system of exporting Speedos' to Thailand seems to be working well. Aussie Blades primary customer in Thailand, a retailer called Rolling Products, Inc., 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, Aussie Blades is using a Thal 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As a result of the weak economy in Thailand, however, many foreign investors have lost confidence in Thailand and have withdrawn their funds.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, Aussie Blades. More specifically, he is wondering whether the effects on the Thai baht may affect Aussie Blades even though its primary Thai customer is committed to Aussie Blades over the next three years. Second, Holt believes that Aussie Blades may be able to speculate on the anticipated movement of the baht, but he is uncertain about the procedure needed to accomplish this. To facilitate Holt's understanding of exchange rate speculation, he has asked you, Aussie Blades' financial analyst, to provide him with detailed illustrations of two scenarios. In the first, the baht would move from a current level of A$0.029 to A$0.020 within the next 30 days. In the second scenario, the baht would move from its current level to A$0.025 within the next 30 days. Based on Holt's needs, he has provided you with the following list of questions to be answered: 1 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$0.022 to A$0.026. ? What are the basic factors that determine the value of a currency? In equilibrium, what is the relationship between these factors? PART 2 EXCHANGE RATE BEHAVIOUR 3 How might the relatively high at the relatively high levels of inflation and interest rates in Thailand affect the baht's valuer (Assume a constant level of Australian inflation and interest rates.) the spot exchange rate is Aso.022 and the inflation difference between Thailand and Australia is 5 per cent in question (3), what should be the expected exchang rate in the market? Explain. 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 Aussie 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? Small business dilemma Assessment by the Sports Exports Company of factors that affect the British pound's value Because the Sports Exports Company (an Australian company) receives payments in British pounds every month and converts those pounds into Australian dollars it needs to closely monitor the value of the British pound in the future. Jim Logan, owner of the Sports Exports Company, expects that inflation will rise substan the United Kingdom while inflation in 2. that inflation will rise substantially in
