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1. Blades are subjected to both transaction and economic exposure.

The value of
Blades contractual transactions in foreign currencies is affected by exchange rate
movements. This sensitivity of Blade’s contractual transactions in foreign
currencies to exchange rate movements is referred to as transaction exposure.
In this case Blades primary customer in Thailand itself to purchase 180, 00 pairs
of roller blades annually at a fixed price of 4,594 Thai Baht for a period of 2
years. Jogs, Ltd., a British retailer would be willing to commit itself to purchase
200,000 pairs of Speedos for a fixed price of 80 pounds per pair. So Blades is
subjected to transaction exposure due to contractual transactions with British and
Thailand. The value of a firm’s cash flows can be affected by exchange rate
movements if it executes transactions in foreign currencies. The sensitivity of the
firm’s cash flows to exchange rate movements is referred to as economic
exposure. In this case Blades imports materials to manufacture 72,000 pairs of
roller blades from Thailand annually at a price of 2,871 Thai baht yen per pair.
Blades imports materials to manufacture 1,700 pairs of roller blades from Japan
annually at a price of 7,440 yen per pair. So Blades is subjected to Economic
exposure where the cash flows are affected by exchange rate movements.

2. Consolidated Net Cash Flow Assessment of Blades, Inc.

Expected Net
Total Total Net inflow Inflow/Outflow
Currency Exchang
Inflow outflow or outflow as Measured
e Rate
in U.S Dollars
British
Pound 16000000 0 16000000 1.5 24000000
Thailand
Baht 826920000 206712000 620208000 0.024 14884992
Japanese
Yen 0 12648000 -12648000 0.0083 -104978.4

Estimating the Range of Net Inflows or outflows for Blades, Inc.

Minimum Maximum
Range of Range of
Total Total
Currency Possible Possible Minimum Maximum
Inflow outflow
Net inflow Exchang Exchange Inflow/ Inflow/
or outflow e Rates Rates Outflow Outflow
British 2352000
Pound 16000000 0 16000000 1.47 1.53 0 24480000
Thailand 1240416
Baht 826920000 206712000 620208000 0.02 0.028 0 17365824
Japanese
Yen 0 12648000 -12648000 0.0079 0.0087 -99919.2 -110037.6
3. The increased correlations between the japans yen and Thai baht will reduce
Blades Transaction Exposure. Japanese Yen and Thai baht are positively
correlated. Since Blades has inflows dominated in baht and would have outflows
dominated in yen, its net transaction exposure will be reduced if these two
currencies were highly correlated. Thus if a weak dollar cycle appears, Blades
will be adversely affected by its exposure to Yen, but favorably affected by its
Baht exposure. During a strong dollar cycle, Blades will be adversely affected by
its exposure to baht, but favorably affected by its pound exposure.

4. Blades should not import components from japan to reduce its net transaction
exposure in the long run because Blades is subjected to transaction exposure for
only a period of 2 years and Blades is uncertain whether the current agreement
with Thailand will be renewed due to increased competition from Thailand.
Thailand Baht has depreciated recently which has reduced Blades profit margins.
The recent economic problems in Thailand have had an effect on Thailand and
other Asian countries. The correlation between Asian currencies such as the
Japanese yen and baht is generally not very high and very unstable and hence
depreciation in baht may affect Blades and hence it would not be advisable for
Blades to import components from Japan in the long run in order to reduce its
transaction exposure.

5. If Blades enters into agreement with Jogs Ltd, Its overall transaction would be
affected to a great extent.

6. The depreciation in baths value will reduce Blades U.S Sales. If there is
depreciation in baths value more no of dollars has to be spent to import materials
from Thailand and receive baht when converted to dollars which will be less and
hence sales will be affected. Blades exports to Thailand and imports from
Thailand and Japan were affected by depreciation then blades profit margin
would reduce substantially. The profit margin from Blades imports and exports
exceeds more than 25% while the Blades domestic production is below 15%.
Hence if the foreign currencies depreciate and the correlation between yen and
baht is not very high and very unstable, sales will be affected and profits will be
reduced. The sale of roller blades to other countries with more stable currencies
may increase Blades sales and thereby increase profits.