Transaction And Translation Exposure Please Respond To The F

Transaction And Translation Exposure Please Respond To The Following

Transaction and Translation Exposure

Please respond to the following: 1 PARAGRAPH From the case study, determine whether Blades is subject to transaction, translation, or economic exposure. Provide one (1) example of the type of exposure that supports your answer. Justify your response. Blades, Case Study Assessment of Exchange Rate Exposure Blades, Inc., is currently exporting roller blades to Thailand and importing certain components needed to manufacture roller blades from that country. Under a fixed contractual agreement, Blades' primary customer in Thailand has committed itself to purchase 180,000 pairs of roller blades annually at a fixed price of 4,594 Thai baht (THB) per pair. Blades is importing rubber and plastic components from various suppliers in Thailand at a cost of approximately THB 2,871 per pair, although the exact price (in baht) depends on current market prices. Blades imports materials sufficient to manufacture 72,000 pairs of roller blades from Thailand each year. The decision to import materials from Thailand was reached because rubber and plastic components needed to manufacture Blades' products are inexpensive, yet of high quality, in Thailand. Blades has also conducted business with a Japanese supplier in the past. Although Blades' analysis indicates that the Japanese components are of a lower quality than the Thai components, Blades has occasionally imported components from Japan when the prices were low enough. Currently, Ben Holt, Blades' chief financial officer (CFO), is considering importing components from Japan more frequently. Specifically, he would like to reduce Blades' baht exposure by taking advantage of the recently high correlation between the baht and the yen. Since Blades has net inflows denominated in baht and would have outflows denominated in yen, its net transaction exposure would be reduced if these two currencies were highly correlated. If Blades decides to import components from Japan, it would probably import materials sufficient to manufacture 1,700 pairs of roller blades annually at a price of 7,440 yen per pair. Holt is also contemplating further expansion into foreign countries. Although he would eventually like to establish a subsidiary or acquire an existing business overseas, his immediate focus is on increasing Blades' foreign sales. Holt's primary reason for this plan is that the profit margin from Blades' imports and exports exceeds 25 percent, while the profit margin from Blades' domestic production is below 15 percent. Consequently, he believes that further foreign expansion will be beneficial to the company's future. Though Blades' current exporting and importing practices have been profitable, Holt is contemplating extending Blades' trade relationships to countries in different regions of the world. One reason for this decision is that various Thai roller blade manufacturers have recently established subsidiaries in the United States. Furthermore, various Thai roller blade manufacturers have recently targeted the U.S. market by advertising their products over the Internet. As a result of this increased competition from Thailand, Blades is uncertain whether its primary customer in Thailand will renew the current commitment to purchase a fixed number of roller blades annually. The current agreement will terminate in three years. Another reason for engaging in transactions with other, non-Asian countries is that the Thai baht has depreciated substantially recently, which has somewhat reduced Blades' profit margins. The sale of roller blades to other countries with more stable currencies may increase Blades' profit margins. While Blades will continue exporting to Thailand under the current agreement for the next 2 years, it may also export roller blades to Jogs, Ltd., a British retailer. Preliminary negotiations indicate that Jogs would be willing to commit itself to purchase 200,000 pairs of Speedos, Blades' primary product, for a fixed price of £80 per pair. Holt is aware that further expansion would increase Blades' exposure to exchange rate fluctuations, but he believes that Blades can supplement its profit margins by expanding. He is vaguely familiar with the different types of exchange rate exposure but has asked you, a financial analyst at Blades, Inc., to help him assess how the contemplated changes would affect Blades' financial position. Among other concerns, Holt is aware that recent economic problems in the region have had an effect on Thailand and on other Asian countries. Although the correlation between Asian currencies such as the Japanese yen and the Thai baht is generally not very high and very unstable, these recent problems have increased the correlation among most Asian currencies. In contrast, the correlation between the British pound and the Asian currencies is quite low. To aid you in your analysis, Holt has provided you with the following data: CURRENCY EXPECTED EXCHANGE RATE RANGE OF POSSIBLE EXCHANGE RATES British pound $1.50 $1.47 to $1.53 Japanese yen $ .0083 $.0079 to $.0087 Thai baht $ .024 $.020 to $.028 From the case study, recommend whether or not Blades should import components from Japan in order to reduce its transaction exposure in the long run. Provide a rationale to support your response

Paper For Above instruction

The case study of Blades, Inc., highlights the company's dynamic international operations, which expose it to various types of exchange rate risks—specifically transaction, translation, and economic exposure. In analyzing Blades’ situation, it becomes evident that the firm is primarily subject to transaction and economic exposure, with limited immediate translation exposure. Transaction exposure occurs due to currency movements affecting the value of specific cash flows from exports and imports, while economic exposure pertains to the broader impact of exchange rate fluctuations on the company's market value and competitive position.

One clear example of transaction exposure in Blades’ case is its import of components from Thailand, which are priced in Thai baht. Given that Blades currently imports rubber and plastic components at roughly THB 2,871 per pair, fluctuations in the Thai baht’s value directly influence the cost of production. If the baht depreciates against the dollar or other base currencies, the cost of importing these components increases, reducing profit margins. Conversely, if the baht appreciates, costs decrease, positively affecting margins. This exposure is tangible because it involves specific cash flows linked to contractual payment obligations denominated in a foreign currency.

Regarding the potential import from Japan, Holt’s strategy to reduce transaction exposure hinges on leveraging the correlation between yen and baht. By importing from Japan, Blades would pay 7,440 yen per pair, with outflows denominated in yen, while inflows in baht could offset the yen outflows if these currencies move in tandem. Since the baht and yen exhibited a high correlation recently, importing components from Japan could mitigate currency risk, stabilizing cash flows. However, this strategy assumes the continuation of such correlation, which is historically low and unstable. Furthermore, the import from Japan could essentially create a natural hedge, where yen payments are offset by baht receipts, thus reducing the net transaction exposure.

From an economic perspective, Blades faces risks related to the overall competitiveness of its products due to exchange rate movements. The recent depreciation of the Thai baht has diminished profit margins, prompting the firm to consider expanding into countries with more stable currencies, such as the UK, where a fixed price agreement is in place with Jogs Ltd. This long-term strategic move aims to shield the company from volatile Asian currencies and secure more predictable revenue streams.

Nevertheless, the decision to import components from Japan to reduce long-term transaction exposure should be made cautiously. The potential benefit relies heavily on the future correlation between yen and baht currencies; if this correlation weakens or reverses, the natural hedge could be lost, exposing Blades to increased risk. Moreover, currency fluctuations, geopolitical issues, and economic instability in Asia threaten the stability of this correlation. Therefore, while importing from Japan could provide short-term risk mitigation, it does not entirely eliminate exposure or guarantee stability in the long run.

Ultimately, Blades should consider diversifying its currency risk management strategies beyond reliance on correlation. Using financial instruments such as forward contracts or options could offer more precise risk mitigation. Additionally, negotiating fixed-price contracts or local currency invoicing with suppliers could further shield the company from adverse exchange rate movements. In conclusion, importing from Japan could be a useful component of Blades’ broader currency risk management strategy, but relying solely on currency correlation is insufficient. A comprehensive approach combining operational strategies and financial hedging would better position Blades to manage transaction and economic exposures effectively over the long term.

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