BLADES, INC.

CASE  (Page 216)

1. The Thai government's intervention efforts are considered direct intervention as the
government is exchanging dollars for baht to strengthen the currency, increasing the
demand for the baht and the supply of dollars for sale, and driving the baht up.
Indirect intervention, which central bank tries to influence the value of a currency by
influencing the factors that determine it. For example, if the Thai government wants
to increase the value of the baht, it can raise interest rates by reducing the Thai money
supply.
2. Thai government interference constitutes undue interference. Using unsophisticated
intervention, the central bank intervenes in the foreign exchange market without
adjusting to changes in the money supply. Using radical intervention, a central bank
intervenes in the foreign exchange market while preserving the money supply. Since
the Thai government converted its dollar reserves into baht on the foreign exchange
market, the dollar money supply has increased. An increased money supply could
lower US interest rates, which could also weaken the dollar against the baht.
Therefore, nonsterile interventions can produce the desired effects of intervention
efforts. If the Thai government's goal is to increase the value of the baht, an untreated
intervention may be more effective.
3. Under a fixed exchange rate system, inflation can be exported from one country to
another. For example, if Thailand experienced relatively high inflation in a fixed
exchange rate system, Thai consumers may have shifted some of their purchases to
US products. Similarly, American consumers may have reduced their imports of Thai
goods. This will cause Thai production to fall and unemployment to rise. In addition,
it may cause higher inflation in the US due to the overwhelming demand for US
products. Therefore, high inflation in Thailand could cause high inflation in the US.
For companies like Blades, this effect may be more obvious as their production costs
will increase, but they export at lower prices. permanent.
4. A freely floating exchange rate could complicate Thailand's inflation problem. For
example, if Thailand experiences high inflation, the baht could weaken. In turn, a
weaker baht can lead to higher import prices, which can increase the price of Thai raw
materials and supplies and thus the price of finished products. In addition, higher
foreign prices may force Thai consumers to buy domestic products. Blades does not
contribute to these problems, as both its exports and imports are denominated in baht.
Therefore, a weaker baht will not have a direct impact on companies importing from
Blades. Blades can still be affected by the freely floating exchange rate system, as it is
currently exposed to exchange rate risk when converting net baht received to dollars.
5. Under the terms of the deal, completing the swap would require Thailand to reverse
swap its baht reserves for dollars (dollars to baht). However, due to the drop in the
value of the baht, Thailand's central bank will need more baht in exchange for the
dollars needed to repay other central banks. The Thai government's purchase of
dollars in the foreign exchange market will increase the demand for dollars and the
supply of baht for sale, which will put downward pressure on the value of the baht.
Since Blades has net capital inflows in baht, it will be negatively impacted by the
completion of the swap if the actions required to complete the deal result in the baht
weakening further.