RSA Manufacturer is a U.S based company with the supposition of their total assets of only $200 million.

Suppose, the company produces a single type of product, roller blades (Speedos). As the chief fifinancial

offificer of RSA, Steven is pleased that his current system of exporting "Speedos" to Thailand seems to be

working well. RSA's primary customer in Thailand, a retailer called Entertainment Products, has

committed itself to purchasing a fifixed number of Speedos annually for the next 3 years at a fifixed price

denominated in baht, Thailand's currency. Furthermore, RSA is using a Thai supplier for some of the

components needed to manufacture Speedos. Nevertheless, Steven 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foreign investors have lost confifidence in Thailand and have withdrawn their funds. Steven 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, RSA. More specififically, he is

wondering whether the effects on the Thai baht may affect RSA even though its primary Thai customer

is committed to RSA over the next 3 years. Second, Steven believes that RSA 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 Steven's understanding of exchange rate speculation, he has asked you,

RSA's fifinancial analyst, to provide him with detailed illustrations of two scenarios. In the fifirst, the baht

would move from a current level of $.022 to $.020 within the next 30 days. Under the second scenario,

the baht would move from its current level to $.025 within the next 30 days. Based on Steven'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 value of $.022 to $.026.

2. What are the basic factors that determine the value of a currency? In equilibrium, what is the

relationship between these factors?

3. How might the relatively high levels of inflflation and interest rates in Thailand affect the baht's value?

(Assume a constant level of U.S. inflflation and interest rates.)

4. How do you think the loss of confifidence in the Thai baht, evidenced by the withdrawal of funds from

Thailand, will affect the baht's value? Would RSA be affected by the change in value, given the primary

Thai customer's commitment? 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?