Independent University, Bangladesh

Assignment -1

Blades, Inc. Case:

Assessment of Future Exchange Rate Movements

Submitted to
Prof. K.M. Zahidul Islam
School of Business (SB)
Independent University, Bangladesh (IUB)

FIN546, Sec: 01
International Financial Management
Summer-2021

Submission Date: 10th July, 2021

 Question: 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 $0.022 to $0.026.

Answer:
The percentage change in the value of the foreign currency is computed as follows:

S  St  1
% 
St  1
St denotes the spot rate at time t and St -1 denotes exchange rate at an earlier period. A positive % Δ
represents appreciation of the foreign currency, while a negative % Δ represents depreciation.

Here,
St = $0.022
St -1 = $0.026

So, the percentage change in the Thai baht will be:

$ 0.026−$ 0.022
%∆ =
$ 0.022

= 0.1818 or 18.18%

Thai Baht would be expected to appreciate by 18.18%.

Question: 2
What are the basic factors that determine the value of a currency? In equilibrium, what is the
relationship between these factors?

Answer:
The value of a currency can be determined by two fundamental factors, used in many economic
applications, which are the supply of the currency and the demand for the currency. As often the case
with an increase in supply, the value of the good/service (in this case currency) will decrease in value.
Contrariwise, if there are a high demand for currency the opposite holds true; the currency will often
increase in value. In equilibrium, the supply of currency and demand for the currency will equal one
another.

The basic factors that determine the value of a currency are the supply of the currency for sale and the
demand for the currency. A high level of supply of a currency generally decreases the currency’s value,
while a high level of demand for a currency increases its value. In equilibrium, the supply of the
currency equals the demand for the currency.
 Question: 3
How might the relatively high levels of inflation and interest rates affect the baht’s value?
(Assume a constant level of U.S. inflation and interest rates.)

Answer:
Inflation and interest rates in Thailand might effects the baht in comparison to same variables in the
U.S.. Inflationary pressures tend to lead to currency depreciation, which increases Thai demand for
American goods as well as Thai demand for dollars. Furthermore, a high level of Thai inflation would
limit demand for Thai goods in the U.S. Furthermore, a high level of Thai inflation would limit demand
for Thai items in the U.S., resulting in an increase in the quantity of baht for sale.

On the other hand, the high level of interest rates in Thailand may cause appreciation of the baht relative
to the dollar. A relatively high level of interest rates in Thailand would have rendered investments there
more attractive for U.S. investors, causing an increase in the demand for baht. Furthermore, U.S.
securities would have been less attractive to Thai investors, causing an increase in the supply of dollars
for sale. However, investors might be unwilling to invest in baht-denominated securities if they are
concerned about the potential depreciation of the baht that could result from Thailand’s inflation.

Question: 4
How do you think the loss of confidence in the Thai baht, evidenced by the withdrawal of
funds from Thailand, will affect the baht’s value? Would Blades be affected by the change in
value, given the primary Thai customer’s commitment?

Answer:
Depreciation of a foreign currency occurs when investors liquidate their foreign currency investments,
consequently increasing the supply of that currency for sale. Because sales are denominated in baht, the
change in value would most likely effect blades. Thus, the depreciation in the baht would have caused a
conversion of the baht revenue into fewer U.S. dollars.

Question: 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?

Answer:
If Thailand's central bank is looking to prevent any further withdrawal of funds from the country, it is
looking to stop the depreciation in the baht. In order to do so, Thailand would have to increase the
interest rates within the country. This would cause internal spending or borrowing to decrease, but
Thailand's investments (e.g. securities) would now become more appealing to U.S. investors. Having
this influx of U.S. investors would cause demand for the baht to increase. The demand for the baht
would cause its value to increase (appreciate) and would solve the problem of funds being withdrawn
from the country.
In order to prevent further depreciation in the bath's value by the wish of Thailand's central bank,
attempt would be made to increase the level of interest rates in Thailand. This In turn, would increase
the demand for Thai baht by U.S. investors, securities of Thai seems to be will more attractive. This
results in creating upward pressure on the currency's value. However, local borrowing and spending
could be reduced by the high interest rates.

Question: 6
Construct a spreadsheet illustrating the steps Blades’ treasurer would need to follow in order to
speculate on expected movements in the baht’s value over the next 30 days. Also show the
speculative profit (in dollars) resulting from each scenario. Use both of Ben Holt’s examples to
illustrate possible speculation. Assume that Blades can borrow either $10 million or the baht
equivalent of this amount. Furthermore, assume that the following short-term interest rates
(annualized) are available to Blades:

Currency Lending Rate Borrowing Rate

Dollars 8.10% 8.20%
Thai baht 14.80% 15.40%

Answer:

Depreciation of the Baht from $0.022 to $0.020

1. Borrow Thai baht ($10,000,000/0.022) 454,545,454.50

2. Convert the Thai baht to U.S. dollars ($454,545,454.50 million × $0.022). 10,000,000.00

3. Lend the dollars at 8.10% annualized, which represents a 0.68% return 10,068,000.00
over the 30-day period [computed as 8.10% × (30/360)]. After 30 days,
Blades would receive ($10,000,000 × (1 + .0068))

4. Use the proceeds of the dollar loan repayment (on Day 30) to repay the 460,363,636.40
baht borrowed. The annual interest on the baht borrowed is 15.40%, or
1.28% over the 30-day period [computed as 15.40% × (30/360)]. The total
baht amount necessary to repay the loan is therefore
(454,545,454.50 × (1 + .0128))

5. Number of dollars necessary to repay baht loan 9,207,272.73

($THB460,363,636.40 × $0.02)

6. Speculative profit ($10,068,000 – $9,207,272.73) 860,727.27

Appreciation of the Baht from $0.022 to $0.025

1. Borrow dollars. 10,000,000.00

2. Convert the dollars to Thai baht ($10 million/$0.022). 454,545,454.50

3. Lend the baht at 14.80% annualized, which represents a 1.23% return 460,136,363.60
over the 30-day period [computed as 14.80% × (30/360)]. After 30 days,
Blades would receive (THB 454,545,454.50 × (1 + .0123))

4. Use the proceeds of the baht loan repayment (on Day 30) to repay the 10,068,000.00
dollars borrowed. The annual interest on the dollars borrowed is 8.20%, or
0.68% over the 30-day period [computed as 8.20% × (30/360)]. The total
dollar amount necessary to repay the loan is therefore
($10,000,000 × (1 + .0068))

5. Number of baht necessary to repay dollar loan ($10,068,000.00/$0.025) 402,720,000.00

6. Speculative profit (THB 460,136,363.60 – THB 402,720,000.00) 57,416,363.60

7. Dollar equivalent of speculative profit (THB57,416,363.60 × $0.025) 1,435,409.09