International Financial Management
Chapter 4: Exchange Rate
Determination
410829523 蘇立榮
410923000 楊家良
410922981 阮鄧河江
Table of Contents
02
01
Blades, Inc.
Case
Small Business
Dilemma
Blades,Inc.
Case
review
01
2 Concerns:
-
Blades Inc are pleased that their
current system of exporting
“Speedos” to Thailand seems to be
working well. Blades’ primary
customer in Thailand, a retailer
called Entertainment Products, has
committed itself to purchasing a
fixed number of Speedos annually for
the next three years at a fixed price
denominated in Baht, Thailand’s
currency. They’re also using a Thai
supplier for some of the components
needed to manufacture Speedos
But they’re concerned about
recent developments in Asia.
Foreign investors from various
countries had invested heavily in
Thailand to take advantage of the
high interest rates there. However,
many foreign investors have lost
confidence in Thailand and have
withdrawn their funds.
-
Is wondering whether the
effects on the Thai baht
may affect Blades even
though its primary Thai
customer is committed to
Blades over the next three
years.
Believes that Blades may
be able to speculate on the
anticipated movement of
the baht, but he is
uncertain about the
procedure needed to
accomplish this.
01
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 $.022 to $.026.
Currency’s value can be measured in percentage change with these Formula
S is meant to represent the spot rate
is meant to represent the spot rate from an earlier date in time
By the formula we can assuming Thai baht
value change from $0.022 to $0.026
that the percentage change is 18.18%.
02
What are the basic factors that determine the value of a
currency? In equilibrium, what is the relationship between these
factors?
●
●
●
●
Demand of the currency that relative to supply
equilibrium .
Supply has inverse relationship Eg. U.S
corporation and individuals buying more goods in
Thailand when Bath Values is decreased.
Demand has direct relationship In Thailand is
more likely to purchase U.S. goods when Bath
Values is increasing.
Equilibrium occurs when supply currency equal
demand currency
03
How might the relatively high levels of inflation and interest
rates in Thailand affect the baht’s value? (Assume a constant
level of U.S. inflation and interest rate）
Inflation Rates
●
●
Inflation in Thailand increases
Thai demand for U.S. goods
and on the other hand
decreases U.S. demand for
Thai goods
So it will be affected U.S.
demand for decreasing Baht
value and increasing supply for
Baht value
* Downward pressure on Baht Value
Interest Rates
●
In Thailand because of
increasing interest rates it
will increase demand for
Baht
* Forward pressure on Baht Value
04
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?
●
●
●
●
●
Blades Inc. may affected by changed in value When
sales are designated in Baht.
Money begins to moving out from Baht into dollars.
Expectations of weaker economic would affected a
reduction of capital inflows in Thailand.
Depreciation would cause the fixed revenue in Baht
and converted into fewer dollars.
Because of large increase for sale in supply of Baht
would be cause Baht to depreciate.
05
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?
●
●
●
If Thailand’s central bank wishes to prevent further
depreciation of Baht value, it would trying to increase
a level of interest rates in Thailand.
On the other hand would increase the demand for Thai
Baht by U.S. investors.
make upwards pressure on the currency value & high
interest rates could reduce a local borrowing and
spending.
06
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 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%
06
Small
Business
Dilemma
02
Because the Sports Exports Company (a U.S. firm)
receives payments in British pounds every month and
converts those pounds into dollars, it needs to closely
monitor the value of the British pound in the future. Jim
Logan, owner of the Sports Exports Company, expects that
inflation will rise substantially in the United Kingdom,
while inflation in the United States will remain low. He
also expects that the interest rates in both countries will
rise by about the same amount.
Increase in inflation in a country affects the purchasing
power of its currency. In case the inflation of a country
increases at a rate higher than the other country, it will
affect the exchange rate of the former’s currency, relative
to the latter. Hence, the former’s currency will suffer
depreciation, in relation to the latter’s currency.
01
Given Jim’s expectations, forecast whether the pound will
appreciate or depreciate against the dollar over time?
In the given case, it is stated that the inflation in United
Kingdom is expected to increase at a rate higher than the
United States. This will cause a shift in trade that place
downward pressure on the pounds value.
It is also stated that interest rates of both the countries will
increase by the same amount, isolating the effect of increase in
inflation. So there shouldn’t be adjusting in the capital flows
between two countries.
Hence, with other factors remaining constant, British Pound is
likely to depreciate against US Dollar.
02
Given Jim’s expectations, will the Sports Exports Company be
favorably or unfavorably affected by the future changes in the
value of the pound?
The transactions involve receipts in British Pound
which are to be converted into US Dollar. With the
British Pound depreciating, amount of US Dollar
receivable for each British Pound will be less.
Hence Sports Exports Company will be unfavorably
affected by the expected change in future value of
Pound.
Thank you