Recall Blades Inc. that is a famous producer of Speedos established a subsidiary in Thailand to manufacture roller blades.This subsidiary of Blades, Inc., just received a special order for 120,000 pairs of Speedos, its primary rollerblade product. Mr. Ben Holt, Blades' chief financial officer (CFO), needs short-term financing to finance this large order from the time Blades orders its supplies until the time it will receive payment.

Here are the information related to this order is provided in Table 5:

Table 5

Blades' information related to order its product

Order quantity

120,000

Selling Price per pair

5,000 THB

Cost of material purchased locally per pair

3,500 THB

Accounts receivable term

3 months after delivery

Time from purchase of material to sale

3 months

Total time from payment for material to collection of account receivables

6 months

To finance the cost of material Holt has identified two alternatives

• Blades could borrow Japanese Yen (JPY) for six (6) months, convert the yen to Thai Baht (THB), and use the THB to pay the Thai suppliers. When the accounts receivable in Thailand are collected, Blades would convert the THB received to yen and repay the Japanese yen loan.
• Blades could borrow THB for six (6) months to pay its Thai suppliers. When Blades collects its accounts receivables, it would use these receipts to repay the THB loan. Thus, Blades will use revenue generated in Thailand to repay the loan, whether it borrows the money in JPY or in THB. Holt's initial research indicates that the 180-day interest rates available to Blades in Japan and in Thailand are 4% and 6% respectively.
• Because of lower interest rates in Japan, Mr.Holt favors borrowing the JPY, though he is aware that he should incorporate the future movements of the JPY-THB exchange rate in his analysis, but he is unsure how to accomplish this.

Mr. Holt has identified the following probability distribution for JPY/THB and THB/USD exchange rates over the next six months, provided in Table 6:

Table 6

Probability distribution of change in JPY/THB and THB/USD exchange rates