As the CFO of Blades, Inc., Ben Holt is happy with the success of their current export system for “Speedos” to Thailand. Blades’ main customer in Thailand, Entertainment Products, has agreed to buy a set number of Speedos each year for the next 3 years at an agreed-upon price in baht, Thailand’s currency. Additionally, Blades has started using a Thai supplier for certain Speedo components.
Despite this, Holt expresses concern over recent events in Asia. Various foreign investors heavily invested in Thailand to capitalize on the high interest rates. Yet, due to Thailand’s weak economy, many of these investors have lost faith and withdrawn their funds. Holt has two main concerns in relation to these developments. Firstly, he wonders about the impact of Thailand’s economic changes on the value of the Thai baht and, consequently, on Blades.
Holt is concerned about the impact of the Thai baht on Blades, despite their main Thai customer’s commitment for 3 years. Holt also needs clarification on how Blades can speculate on the movement of the baht. As Blades’ financial analyst, your task is to provide detailed examples of two scenarios in order to help Holt understand exchange rate speculation. In scenario one, the baht would decrease from $.22 to $.020 within 30 days. In scenario two, the baht would increase from its current level to $.025 within 30 days. Holt has provided you with questions that need answers:
- How are percentage changes in a currency’s value calculated? Please provide a numerical example assuming a change in the Thai baht’s value from $.022 to $.026.
- What fundamental factors influence a currency’s value? When in equilibrium, what is the relationship between these factors?
3. The value of the baht in Thailand may be affected by high levels of inflation and interest rates, assuming U.S. inflation and interest rates remain constant.
4. If funds are withdrawn from Thailand, it suggests a depreciation of the Thai baht that could impact its value and potentially affect Blades’ primary Thai customer’s commitment.
5. To prevent a withdrawal of funds and maintain stability in the currency’s value, what measures should Thailand’s central bank implement?
How can the objective be achieved by using interest rates? Construct a spreadsheet that shows the steps Blades’ treasurer needs to take to speculate on the expected movements in the value of the baht over the next 30 days. Also, show the speculative profit (in dollars) that would result from each scenario. Use both of Ben Holt’s examples to illustrate potential speculation. Assume that Blades can borrow either $10 million or its equivalent in baht. Additionally, assume that the following short-term interest rates (annualized) are available to Blades:
