Assessment of Future Exchange Rate Movements

Assessment of Future Exchange Rate Movements As the chief financial officer of Blades, Inc., Ben Holt is pleased that his current system of exporting “Speedos” to Thailand seems to be working well. Blades’ primary customer in Thailand, a retailer called Entertainment Products, has committed itself to purchasing a fixed number of Speedos annually for the next 3 years at a fixed price denominated in baht, Thailand’s currency. Furthermore, Blades is using a Thai 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As a result of the weak economy in Thailand, however, many foreign investors have lost confidence in Thailand and have withdrawn their funds. Ben 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, Blades. More specifically, he is wondering whether the effects on the Thai baht may affect Blades even though its primary Thai customer is committed to Blades over the next 3 years. Second, Holt believes that 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, Blades’ financial analyst, to provide him with detailed illustrations of two scenarios. In the first, 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 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. Overview

Blades, Inc., is a USA based company that has been in corporate in the United States for three years. Blade relatively is a small Company, with total assets of only $200 million. The company produces only a single type of roller blade. Ben Holt the CFO of the Blades Inc.

Financial Information

Total assets of was only $200 million and first year net income of $3.5 million. Return on asset is 7%. It stock price has fallen from high of $20 per share three years ago to $12 last year.

ON THE BASIS OF BLADES INC. CASE

1. What are the advantages Blades could gain from importing from and or exporting to a foreign country such as Thailand? In recent years Thailand experience economy downturn and due to weak economic conditions Blades can gain the followings: • Low prices. Lowering Blades’ cost of goods sold. If the inputs (rubber and plastic) are cheaper when imported from a foreign country such as Thailand, this would increase Blades’ net income. • Import raw material and supplies will be cheap as compare to USA. • Cost reduction in material can achieve economies of scale. • As far as exporting is concerned, Blades, Inc. could be one of the first firms to sell roller blades in Thailand. Since Blades is considering longer range plans in Thailand, importing from and exporting to Thailand may present it with an opportunity to establish initial relationships with some Thai suppliers. • Can increase competitiveness. Competitors are also importing and exporting from Thailand • To survive in its own country

2. What are some of the disadvantages Blades could face as a result of foreign trade in the short run? In the long run? There are several disadvantages to foreign trade. The currency fluctuations in Thailand dollar would affect Blades. For instance the dollar cost of imported inputs may become more expensive over time. Blades would also be exposed to the economic conditions... BLADES, INC. CASE Assessment of Future Exchange Rate Movements As the chief financial officer of Blades, Inc., Ben Holt is pleased that his current system of exporting “Speedos” to Thailand seems to be working well. Blades’ primary customer in Thailand, a retailer called Entertainment Products, has committed itself to purchasing a fixed number of Speedos annually for the next 3 years at a fixed price denominated in baht, Thailand’s currency. Furthermore, Blades is using a Thai 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. Ben 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, Blades. More specifically, he is wondering whether the effects on the Thai baht may affect Blades even though its primary Thai customer is committed to Blades over the next 3 years. Second, Holt believes that 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, Blades’ financial analyst, to provide him with detailed illustrations of two scenarios. In the first, 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 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... [continues]