BLADES, INC. CASE
Assessment of Future Exchange Rate Movements
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 $.022 to $.026.
The percentage change in the value of a currency is calculated by comparing the spot rates at
two specific time periods.
𝑆𝑡 − 𝑆𝑡−1
𝑆𝑡−1
St = Current Spot rate
St-1= Spot rate of the earlier date
A positive change indicates that the currency has appreciated while a negative one denotes that
it has depreciated. Thus the percentage change in foreign currency value is:
$0.026 − $0.022
= 18.182%
$0.022
Thus, the Baht would be expected to appreciate by 18.182%
2. What are the basic factors that determine the value of a currency? In equilibrium, what
is the relationship between these factors?
The basic factors that determine the value of a currency are:

The supply of the currency and

The demand of the currency
Like any other product in the market, the price of any currency is determined by these two
forces. The demand schedule is downward sloping because corporations and individuals in
US, for instance, will be encouraged to purchase more Thai goods when the Baht is worth less
and vice versa. There is a positive relationship between value of Baht and quantity of Baht
for sale. When the Baht is valued high, Thai consumers and firms are more likely to purchase
US goods and thus they supply greater number of Baht to the market to be exchanged for
dollars.
At equilibrium, the quantity of Baht demanded will be equal to the quantity of Baht supplied.
Thus the value of the currency as desired by the investors will be equal to the value the sellers
are ready to give up.
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3. 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 rates.)
The Baht would be affected both by inflation levels and interest rates in Thailand relative to
levels of these variables in the U.S.
Senario-1: Trade Flow > Capital Flow
If the trade flow is lower than capital flow, the impact of relative interest rate will be higher
than inflation on currency value.
This 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. This will lead to an
increase in the supply of the USD in the
Figure 1: Impact of high interest rate
Thai economy and an increase in demand
for the Thai Baht by US investors.
This will lead to a higher equilibrium price or exchange rate for the Thai Baht, meaning that
the value of Thai Baht will appreciate.
A high level of inflation tends to result in
currency depreciation, as it would increase the
Thai demand for U.S. goods, causing an
increase in the Thai demand for dollars. This
will lead to a fall in demand for locally
produced goods in Thailand and increase in
demand for US goods as they will become
more expensive in comparison to US goods
because the level of inflation in the US has
Figure 2: Impact of inflation
remained unchanged. This will lead to an increase in demand for US currency in exchange for
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the Thai Baht creating a downward pressure on Baht’s value. Also, US consumers will be less
willing to buy Thai goods as they are more expensive now causing the supply of the USD to
fall in the Thai economy.
Thus two factors combined will have an
upward pressure on the value of the Baht.
This will lead to a higher equilibrium price or
exchange rate for the Thai Baht, meaning that
the value of Thai Baht will appreciate.
Figure 3: Currency value appreciate
Senario-2: Trade Flow < Capital Flow
If the trade flow is lower than capital flow, the impact of relative inflation will be higher than
interest rate on currency value.
This 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. The effect will be
quite similar to previous scenario.
Figure 4: Impact of interest rate
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High inflation rates will lead to depreciation of
the Baht and high levels of interest will cause
the value of Baht to appreciate.
Figure 5: Impact of inflation
High inflation rates will lead to depreciation of
the Baht and high levels of interest will cause the
value of Baht to appreciate. Thus two factors
combined will have a downward pressure on the
value of the Baht. This will lead to a lower
equilibrium price or exchange rate for the Thai
Baht, meaning that the value of Thai Baht will
depreciate
Figure 6: Currency value depreciate
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?
The loss of confidence in the Thai Baht caused investors to withdraw their funds from
Thailand. This will lead to a fall in supply of foreign currencies in Thailand. The demand for
Thai Baht has and will fall due to loss of investors’ confidence. This will cause the Thai Baht
to be devalued, meaning, the exchange rate for Thai Baht will be lower. This is bad news for
Blade Inc. as they have agreed to sell Speedos at a fixed price denominated in the Thai
currency.
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If the value of Thai Baht depreciates, it
means that each unit of the Thai currency
will now fetch fewer US dollars as
opposed to when the Baht was stronger.
This will lead to a loss in revenue for
Blades Inc. and in turn a fall in profit
level.
However, Blades Inc. imports some of the
components used to manufacture Speedos
Figure 7: Effect of loss of confidence on Thai Baht
from Thailand. The price of those supplies will fall as a result of the depreciation of the Thai
Baht leading to a lower cost of production for speedos. But that might not be enough to offset
the fall in revenue because not all the components of Speedo are imported from Thailand.
Therefore it is necessary to know what portion of the raw materials come from Thailand in
order to determine its effects on profits. We would also need to know how much of the sales
prices go into paying for costs of production as that will also influence profit levels
significantly before we can reach any conclusion about whether the fall in revenue from
Thailand can be offset by the lower costs of production that was accompanied by the
depreciation of the Thai Baht.
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?
Foreign investors from various countries had invested heavily in Thailand to take advantage
of the high interest rates there. As a result of the weak economy in Thailand, however, many
foreign investors have lost confidence in Thailand and have withdrawn their funds which
caused depreciate value of the Thai Baht.
In order to prevent foreign investors from withdrawing their funds, The Bank of Thailand, the
central bank of Thailand, can increase interest rates for foreign investors. As a result, Thai Baht
will appreciate. This will also discourage them from withdrawing their money from Thailand
and also perhaps encourage them to invest further.
We know, Real interest rate= Nominal Interest rate- Inflation
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Suppose, the relative interest rate of Baht is increased from 6 to 9 percent. At the same time
suppose, the relative inflation rate increases from 7 to 9 percent. Hence the increase in the real
interest rate is 1 percent (3%-2%). Now, to stop the withdrawal of fund, the real interest rate
of Baht needs to be higher than that of other foreign currencies. This relative real interest rate
must be high enough to mitigate the depressing effect of withdrawal. The following graph
explains this phenomenon:
As a result of the withdrawal of funds, the supply of Baht increased as the foreign investors
are liquidating their accounts. This is shown by the supply curve S1. Now if the Government
makes real interest rate relatively high in Thailand, the selling pressure on Baht will ease. The
supply of Baht to the investors will decrease as the current holders of Baht will not want to put
them for sell in order to enjoy higher interest rate income. The foreign investors will want to
make new investments in Baht. Hence the demand curve will shift from D to D2. The new
equilibrium will be at E1
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