BLADE INC CASE ASSESSMENT GOVERNMENT ON

EXCHANGE RATE

1. Did the intervention effort by the Thai government constitute direct or indirect
intervention ? Explain.

The Thai government's intervention attempt was direct since the government exchanged
dollar reserves for baht in order to boost the currency. This measure would boost demand,
putting upward pressure on the baht's value.

2. Did the intervention by the Thai government constitute sterilized or nonsterilized

intervention? What is the difference between the 2 types of intervention? Which type do
you think would be more effective in increasing the value of the baht? Why?

A central bank uses nonsterilized intervention to interfere in the foreign currency market
without adjusting for changes in the money supply. Furthermore, a rise in the money
supply may lower US interest rates, further weakening the dollar against the baht. As a
result, nonsterilized intervention might amplify the desirable outcomes of the
intervention.

3. If the Thai baht is virtually fixed with respect to the dollar, how could this affect U.S.
Levels of inflation? Do you think these effects on the U.S. economy will be more
pronounced for companies such as Blades that operate under trade arrangements
involving commitments or for firms that do not? How are companies such as Blades
affected by a fixed exchange rate?

If the Thai baht is essentially fixed against the dollar, this might limit the ability to export
inflation to the United States. Aside from that, it might have an influence on US
businesses since firms with long-term trade agreements are unable to react to new market
conditions, while those with no contractual commitments are rigid. If Blades affected by
 a fixed exchange rate, other comapanies might have no currency risk and many MNCs
are still vulnerable to economic condition.

4. What are some of the potential disadvantages forThai levels of inflation associated with
the floatingexchange rate system that is now used in Thailand? Do you think Blades
contributes to these disadvantages to a great extent? How are companies such as Blades
affected by a freely floating exchange rate?

 The potential disadvantage:

- For Thai perspective, if the Thai baht weakness, it would cause import price to be
higher.
- If Thailand experiences high inflation, price of Thailand materials and suppliers
increase, which will in turn increase Thailand prices of finished goods.
 Blade has an agreement with Entertainment Products that it will sent 180.000 pairs of
“ speeedous” at a fixed prices. Blades can not increase prices otherwise it would
contribute to these disadvantages.
 Companies like Blades are strongly affected by freely floating exchange rate.
Especially, if they selll their products at a fixed price and buy materials and supplies
at floating rate.

5. What do you think will happen to the Thai baht’svalue when the swap arrangement is
completed? Howwill this affect Blades?

To complete the trade, they must buy dollars on the market - more demand for dollars -
higher supply of baht - downward pressure on the baht
Due to the weakening of the Thai baht, the revenue from Blades exports to Thailand has
decreased. The impoerted resources, on the other hand, will be less expensive.