Blades Inc Case: Assessment Of Government Influence On Excha

Blades Inc Case Assessment Of Government Influence On Exchange Rate

Recall that Blades, the U.S. manufacturer of roller blades, generates most of its revenue and incurs most of its expenses in the United States. However, the company has recently begun exporting roller blades to Thailand. The company has an agreement with Entertainment Products, Inc., a Thai importer, for a 3-year period. According to the terms of the agreement, Entertainment Products will purchase 180,000 pairs of “Speedos,” Blades’ primary product, annually at a fixed price of 4,594 Thai baht per pair.

Due to quality and cost considerations, Blades is also importing certain rubber and plastic components from a Thai exporter. The cost of these components is approximately 2,871 Thai baht per pair of Speedos. No contractual agreement exists between Blades, Inc., and the Thai exporter. Consequently, the cost of the rubber and plastic components imported from Thailand is subject not only to exchange rate considerations but to economic conditions (such as inflation) in Thailand as well. Shortly after Blades began exporting to and importing from Thailand, Asia experienced weak economic conditions.

Consequently, foreign investors in Thailand feared the baht’s potential weakness and withdrew their investments, resulting in an excess supply of Thai baht for sale. Because of the resulting downward pressure on the baht’s value, the Thai government attempted to stabilize the baht’s exchange rate. To maintain the baht’s value, the Thai government intervened in the foreign exchange market. Specifically, it swapped its baht reserves for dollar reserves at other central banks and then used its dollar reserves to purchase the baht in the foreign exchange market. However, this agreement required Thailand to reverse this transaction by exchanging dollars for baht at a future date.

Unfortunately, the Thai government’s intervention was unsuccessful, as it was overwhelmed by market forces. Consequently, the Thai government ceased its intervention efforts, and the value of the Thai baht declined substantially against the dollar over a 3-month period. When the Thai government stopped intervening in the foreign exchange market, Ben Holt, Blades’ CFO, was concerned that the value of the Thai baht would continue to decline indefinitely. Since Blades generates net inflow in Thai baht, this would seriously affect the company’s profit margin. Furthermore, one of the reasons Blades had expanded into Thailand was to appease the company’s shareholders.

At last year’s annual shareholder meeting, they had demanded that senior management take action to improve the firm’s low profit margins. Expanding into Thailand had been Holt’s suggestion, and he is now afraid that his career might be at stake. For these reasons, Holt feels that his career might be at stake. For these reasons, Holt feels that the Asian crisis and its impact on Blades demand his serious attention. One of the factors Holt thinks he should consider is the issue of government intervention and how it could affect Blades in particular. Specifically, he wonders whether the decision to enter into a fixed agreement with Entertainment Products was a good idea under the circumstances.

Another issue is how the future completion of the swap agreement initiated by the Thai government will affect Blades. To address these issues and to gain a little more understanding of the process of government intervention, Holt has prepared the following list of questions for you, Blades’ financial analyst, since he knows that you understand international financial management. BLADES, INC. CASE: Assessment of Potential Arbitrage Opportunities CASE STUDY FOR DISCUSSION 1b Recall that Blades, a U.S. manufacturer of roller blades, has chosen Thailand as its primary export target for Speedos, Blades’ primary product. Moreover, Blades’ primary customer in Thailand, Entertainment Products, has committed itself to purchase 180,000 Speedos annually for the next 3 years at a fixed price denominated in baht, Thailand’s currency.

Because of quality and cost considerations, Blades also imports some of the rubber and plastic components needed to manufacture Speedos from Thailand. Lately, Thailand has experienced weak economic growth and political uncertainty. As investors lost confidence in the Thai baht as a result of the political uncertainty, they withdrew their funds from the country. This resulted in an excess supply of baht for sale over the demand for baht in the foreign exchange market, which put downward pressure on the baht’s value. As foreign investors continued to withdraw their funds from Thailand, the baht’s value continued to deteriorate.

Since Blades has net cash flows in baht resulting from its exports to Thailand, deterioration in the baht’s value will affect the company negatively. Ben Holt, Blades’ CFO, would like to ensure that the spot and forward rates Blades’ bank has quoted are reasonable. If the exchange rate quotes are reasonable, then arbitrage will not be possible. If the quotations are not appropriate, however, arbitrage may be possible. Under these conditions, Holt would like Blades to use some form of arbitrage to take advantage of possible mispricing in the foreign exchange market.

Although Blades is not an arbitrageur, Holt believes that arbitrage opportunities could offset the negative impact resulting from the baht’s depreciation, which would otherwise seriously affect Blades’ profit margins Holt has identified three arbitrage opportunities as profitable and would like to know which one of them is the most profitable. Thus, he has asked you, Blades’ financial analyst, to prepare an analysis of the arbitrage opportunities he has identified. This would allow Holt to assess the profitability of arbitrage opportunities very quickly.

Paper For Above instruction

The influence of government intervention in foreign exchange markets plays a significant role in shaping the currency landscape and, consequently, impacts multinational companies like Blades Inc. Understanding these dynamics is crucial for firms engaged in international trade, especially when their profits hinge on currency stability. In this analysis, we explore the effects of Thai government intervention on the Thai baht, the implications for Blades Inc., and the potential arbitrage opportunities arising from currency mispricings.

Thailand’s experience during the Asian financial crisis exemplifies how government actions and market forces interact to influence exchange rates. In response to a declining baht, the Thai government intervened by purchasing baht using dollar reserves, aiming to prevent a sharp devaluation. This intervention, however, was ultimately unsuccessful, as market pressures overwhelmed government efforts, leading to a significant devaluation of the baht. Such interventions temporarily stabilize currency values but often carry the risk of overshooting or failure if market sentiment shifts rapidly.

The direct impact on a company like Blades Inc. revolves around the exchange rate fluctuations affecting profitability. Since Blades has committed to fixed-price sales denominated in Thai baht, depreciation of the baht diminishes the U.S. dollar value of these sales when converted back to USD, thereby reducing profit margins. Conversely, the company’s costs for imported components are also affected—if the baht weakens, the USD cost of Thai imports may rise, further squeezing margins.

Government intervention attempts can create arbitrage opportunities, especially if the market misprices currencies relative to their "fundamental value." Arbitrage involves exploiting price differences—such as discrepancies between spot and forward rates—by engaging in currency transactions that profit from the misalignment. Holt’s analysis of three arbitrage options highlights how firms can hedge or capitalize on these mismatches to safeguard profit margins or generate additional income.

Thailand’s situation underscores the importance of analyzing currency markets and understanding the tools available to mitigate risks—like forward contracts, options, and diversification of currency exposure. Forward contracts, in particular, are widely used by multinational firms to lock in exchange rates for future transactions, thus insulating their margins from adverse currency movements. However, when mispricings occur, carefully executed arbitrage can be a lucrative strategy.

For Blades Inc., the key takeaway is that government interventions, while intended to stabilize currency markets, can introduce volatility and opportunities for informed traders. The company must evaluate whether the spot and forward rates offered by banks reflect true market conditions or are susceptible to arbitrage exploits. Given the weak economic conditions in Thailand, continued currency depreciation can further threaten firms with exposure to Thai currency by reducing revenue in USD terms and increasing costs.

In conclusion, navigating the complex landscape of government influence on exchange rates requires continuous monitoring and strategic planning. By understanding government actions and utilizing financial instruments effectively, Blades Inc. can protect its profit margins and possibly turn currency fluctuations to its advantage through arbitrage. This analysis highlights the importance of currency risk management in international operations and the need for proactive strategies in the face of volatile political and economic environments.

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