Department of Management Sciences

Course: International Finance

Topic: Case Study of Blades

Course code: FINA 4120

BBA (2015-2019)

Section (A) Eve

7th Semester

Submitted to:

Mam. Sehrish Farhaan

Submitted by:

Anna Hamid (BBA-15-2008)

Aqsa Tariq (BBA-15-2014)

Date of submission

January 25, 2019

 BLADES, INC.

Case I - Assessment of Future Exchange Rate Movements

Answer 1

Percentage change in currency value = S – S t-1 / S t-1

S(t-1) = spot rate but from an earlier date = $0.022

S = spot rate = $0.026

Percentage change in currency value = 0.026 – 0.022 / 0.022

= 0.040 / 0.022

= 0.18180 * 10

Percentage change in currency value = 18.18 %

Because it is a positive percentage change, the Baht would appreciate by 18.18 %

Answer 2

Factors that determine value of currency are as follows

1. Supply of the currency for sale

if the supply is high than usually the currency’s value decrease

2. Demand for the currency

if the demand is high usually the value of the currency increases.

In equilibrium the supply and demand are interest at an equal point.

Answer 3

High Inflation effect on baht value:

High level of inflation in Thailand cause baht currency to be depreciate, and that would result
in an increase in buying goods in the U.S Thai demand for U.S dollars increased because Thai
people need dollars to buy U.S goods. Also, a high level of inflation would reduce the U.S
demand for Thai goods, U.S people are less tempted to buy goods in Thailand and that would
cause an increase in the supply of baht for a lower price.

Page | 2
High Interest rate effect on baht value:

High level of interest rates can cause appreciation of the bath and attracted more U.S investors
to invest in Thailand, that would cause an increase in the demand for the baht because U.S need
the baht for their investments. And it would be less attractive for the Thai investors to invest in
the U.S., which would cause an increase in the supply in dollar for a lower price.

Answer 4

Normally, depreciation results when the investors withdraw their investment from the country
they invested in. That would cause an increase in the sale of the currency. Blade would be
affected by change in value, as the sales are denominated in baht. Thus, the depreciation in baht
would have caused conversion of baht revenue into fewer U.S dollars.

Answer 5

If Thailand’s central bank wishes to prevent withdraw of funds, it would attempt to increase
the level of interest rates in Thailand. In turn, this would increase the demand for Thai baht by
U.S. investors, as Thai securities would now seem more attractive. This would place upward
pressure on the currency’s value. However, the high interest rates could reduce local borrowing
and spending.

Case II – Assessment of Government Influence on Exchange Rates

Answer 1

As the government exchanged the reserves in dollars for baht for the currency strengths, the
intervention efforts by the Thai government constituted direct intervention. Such an action
would lead to an increase in demand for baht and the same time supply of dollars leading to an
upward pressure on the baht. Whereas in indirect intervention, currency value is influenced by
the central bank. Central bank would increase the interest rate by decreasing the Thai money
supply to strengthen the baht.

Answer 2
The intervention by the Thai government constituted non-sterilized intervention. Using no
sterilized intervention, a central bank intervenes in the foreign exchange market without
adjusting for the change in money supply. Using sterilized intervention, a central bank
intervenes in the foreign exchange market while retaining the money supply. Therefore, non-
sterilized intervention would be more effective.

Page | 3
Answer 3
If the Thai baht is fixed with respect to dollars, then this would lead the Thai production down
and unemployment up. Also, it could cause higher inflation in the U.S. due to the excessive
demand for U.S. products. Thus, the high inflation in Thailand could cause high inflation in
the U.S. For the Blades, this effect would probably be more pronounced as their cost of
production would rise, but they export at a fixed price.
Answer 4
Thailand inflation will be compounded due to freely floating exchange rate. The baht will be
weakening with high inflation from Thai perspective, causing import prices increases, which
makes the costs of Thai’s materials and supplies become expensive, therefore rises the prices
of finished goods.
Blades do not contribute to these disadvantages, as both its exports and imports are
denominated in baht. Consequently, a weaker baht would have no direct impact on companies
importing from Blades.
Blades could still be affected by a freely floating exchange rate system, as it is now
subject to exchange rate risk when converting the net baht received to dollars.

Page | 4