Finance 490 International Finance

Blades Inc.
Case Study

Alex Reis

CSU Long Beach, CA

Chapter 1
Question 1
Blades Inc., advantages in exporting their products to countries such
as Thailand are that there is no competition from other firms and Thailand's
economy is in infancy stage. This gives Blades a competitive advantage if
their first roller-blade company in Thailand. If they can successfully introduce
their products this will increase revenues and also increase all shareholders
wealth. Importing raw materials(plastic) and importing small components
(plastic parts, wheels, leather, laces, etc.) will decrease their overall cost of
goods sold because they will be able to purchase these materials at a lower
cost, and also take advantage of the cheaper labor cost available in Thailand.
Thailands currency the Thai Baht exchange rate to the U.S Dollar is 36.034
USD, meaning that the purchasing power of the dollar is very strong in
Thailand. If they can successfully import cheap labor and raw materials and
export roller-blades to Thailand, revenues will increase and cost of goods sold
will decrease, and all shareholders wealth will increase, and investors will be
more optimistic in how managers conduct business at Blades Inc.,
Question 2
Blades Inc.s decision on exporting to and importing from a foreign
country has disadvantages in both the short-run and the long run. Some
disadvantages in the short-run of exporting are that there can be a lack of
communication between Blades Inc.s executives and the employees at

Thailand due to a language barrier. A difference in culture and trade

regulations can have a major impact because they are a smaller company.
Also, in the long run, exporting can have a disadvantage in the international
political risk and the exchange rate risk. Foreign governments may raise
taxes or impose barriers on subsidiaries.
The disadvantage of importing in the long run is the foreign exchange
risk. A sudden change in the currency exchange rate may result you in
suffering a loss in value. Also, environmental constraints by Thailands
government may be imposed. In the short-run, if a recession occurs this
would cause Blades Inc. to suffer from decreased sales.
Question 3
According to the chapter, three theories of international business are
applicable to Blades Inc.: the comparative advantage, the imperfect markets,
and product life cycle. Before going into detail and explaining how these
theories apply to Blades Inc. and its operation in the country of Thailand, it is
probably a good idea to define what the three theories actually mean. The
first one, the comparative advantage theory, is an economic law that
explains how a country ought to specialize in activities it can perform more
efficiently in comparison other countries. The theory also suggests that this
country must export all products and services that can be produced more
resourcefully, and it should import the products that cannot be produced in
the same manner. A company achieves comparative advantage over its

competitors when, in some case, it provides the lowest price or superior

quality of a product.
The goal of every multinational is to attain not only a comparative
advantage, but a sustainable one that is lasting and hard to be imitated by
the competition. In the case of Blades Inc., the theory applies to the
company because the company has a superior process in its manufacturing
approach, which gives the rollerblade company a lasting advantage over
other U.S. companies as well as Thai firms long-run benefit.
The second theory, the imperfect markets, suggests that resources
such as labor, land, and production inputs are difficult to be obtained by the
multinational (MNC); therefore, MNC has to find those resources in other
countries. For Blades Inc., importing materials such as rubber and plastic
from Thai suppliers and exporting final goods back to the foreign country,
characterizes the application of this theory to Blades Inc. This is true in the
short run, or at least until it is cheaper to import inputs from Thai, and
number of competitors in the Thai market remains low.
The last international business theory mentioned in the chapter is the
product life cycle (PLC). As the Blades Inc. faces diminished sales in the
domestic market (end of PLC), it has to find a way to stay competitive within
its industry at least in the Thai market (begin of PLC). Establishing a
subsidiary in Thailand gives the company this opportunity.

Question 4
Blades Inc., having recently experienced plateauing sales of their
flagship roller blades, are considering the Thai market because of its
comparative advantage of cheap and readily available raw materials such as
rubber and plastic. This comparative advantage offered by the Thai market is
justifiable in its appeal to Blades Inc., however it does not come without the
uncertainties typically associated with any developing/underdeveloped
economy. Because Thailands economy is still in its infancy, it is imperative
that Blades considers the uncertainties associated with exposing its
operations to foreign economic conditions such as political risk, exchange
rate risks, and other socio economic conditions. Rather (or alongside) relying
on a brick and mortar subsidiary in Thailand with hopes of penetrate their
strengthening market, Blades should consider pursuing a joint venture
initiative with a stronger foreign market who can better support sales of
leisure items like roller blades. Thailand should be viewed as a means of
acquiring cheap inputs, not necessarily improving sales. By partnering with a
company in a better established economy, Blades Inc. reduces its risks of
exposing itself to volatile foreign exchange rates, political disturbance, and
lack of clear information. By investigating and selling to stronger economies
in Europe, Japan, or the Middle East, Blades may experience a much more
profitable, risk-averse, and worthwhile return on investment as more
consumers are able to purchase luxury items in already-established
economies. Remember, Blades is looking for a rather immediate solution to

its declining sales, not for a solution pegged to an emerging economy that
may take time to produce substantial sales figures. Furthermore, joint
ventures help take care of the agency problems by keeping the parent
company actively vested in the success of the foreign subsidiary, and still
answering to the needs of domestic shareholders. To add, initially sourcing
inputs from Thailand to decrease the bottom line costs makes more sense
than setting up a sales force and actively advertising to such a small market
of luxury consumers. If Blades Inc. does want to move into underdeveloped
economies, however, then it should allow for a slight cut in the quality of its
products. This will allow for the sale of its roller blades at a lower price, in
turn allowing less wealthy consumers in emerging markets to afford their
products.

Chapter 2
Question 1
Blades Inc. will find itself in a rather good position in terms of exports
to its buyers in Thailand. Because Blades invoices its clients in the local
currency, Thai businesses will feel inclined to purchase more goods from
Blades (a foreign company) rather than spending their inflationary currency
on ever-increasing prices of local products. The Thai buyers are getting a
good deal, and in turn Blades is selling more physical product. However, for
every Thai baht Blades receives from the export of its roller blades, it loses

actual purchasing power due to the inflationary nature of the currency this,
obviously, is bad news for Blades, especially if Blades is required to pay for
its raw material imports from Thailand in baht, which would no doubt raise
the price of above mentioned inputs. Ultimately, Blades will most likely be
negatively affected by the inflationary nature of the baht, largely due to the
fact that Blades invoices its buyers in local currency.
Question 2
If other competitors follow Blades Inc., into Thailand it will affect the
cost of raw materials and labor costs because the demand for both will go up
and the supply will stay the same; meaning that all costs of goods sold will
increase. Any advantages that Blades Inc., had from exporting raw materials
will disappear if many competitors copy their tactics. Also if competitors
import their roller-blades into Thailand, this will drive down the revenues
because the supply of roller-blades in Thailand will increase and could create
price wars, and cause Blades having too much inventory in their warehouses.

Question 3
A decreasing level of national income in Thailand will highly affect
Blades financially because consumers have less money to spend. Also,
because they are selling a roller blade, which is a leisure product, its not a
need for Thai people but rather a want. If there is a decrease in income, this

would be one of the first products they would start to stop buying. Also,
Blades has committed to a 3 year invoice in which would hurt his inventory
turnover and hurt his profit. The importer may also not renew his agreement
and this can jeopardize his company.
Question 4
In order to answer the question, demand for rollerblades in Thailand is
taken into consideration with respect to both Blades Inc. and the U.S.
exporters group. If the Thai continues to depreciate against the American
dollar (USD), the demand for U.S. exporter products would decrease because
Thai importers need more units of local currency - the baht, to pay the
products since they are invoiced in USD. This ultimately will have a positive
effect on the demand for Blades products in the Thai market. As the
company invoices its customers in the baht currency, it gives an incentive to
Thai importers to keep buying its products. However, the depreciation of the
baht for Blades Inc. hurts its financial success in the Thai market. Because
Blades invoices its customers in baht, it receives less USD in exchange
given the continued depreciation.
Currently, a wave of currency depreciation has been hitting
international trade among less developed countries and more influential
economies. Brazil is a great example. Over the past six months, Brazils
currency has devalued so much that many companies in Brazil are now
declaring bankruptcy because they simply cant pay for debts issued in USD
currency. The commodity boom that made Brazilian producers so confident

about the future came to an end, creating an unbalanced market. It is

unfortunate for countries such as Brazil, but it is a reality that impacts the
life of entire nations.

Chapter 3
Question 1
A point of concern is that there is a trade-off between the high interest
rates in Thailand and the delayed conversion of baht into dollars. While
investing the money in Thailand could yield more return due to the higher
interest rate, the delayed conversion of baht into dollars means that all risk
is not adverted. Therefore, risk still exists because you could gain more in
interest but be unable to transfer the currency to USD before it devalues.

Question 2

If net baht received from Thai operations is invested back in Thailand,

U.S. operations will be affected. Blades is currently paying 10% on U.S.
dollars

borrowed and needs more financing for the firm. By keeping foreign revenue
abroad, the firms financing will be severely limited.
Question 3

Chapter 4

Question 1
A positive percentage change indicates that the foreign currency has
appreciated while a negative percentage change indicates that it has
depreciated. Percentage change in a currencys value is measured by
subtracting the new rate by the old rate all divided by the new rate.
(.026-.024) / .026 = 0.15 = 15%. Percent in foreign currency value S
St1/St1
Question 2
Various factors will influence the demand and supply of a currency. This
volatility in the demand/supply relationship is represented by the rising and
falling of the spot rate of exchange which is, essentially, the equilibrium
level of supply and demand for a particular currency in relation to another.

The first factor to determine the value of currency is the relative

inflation rate. Changes in relative inflation rates effects international
trade activities due to the inflated currency having less buying power,
thus effecting the amount of goods bought and sold on international
markets. This change in demand of goods in turn alters the demand for
and supply of currencies. If the USA experienced substantial inflation
compared to Thailand, more Thai products would be bought due to
lower Thai prices, thus resulting in a higher demand for Thai Baht. This
scenario would raise the demand for Thai currency, and increase its

value. In addition, the inflationary dollar would dissuade Thailand from

purchasing US goods, resulting in a reduction in the supply of Thai
Baht, further pushing up the spot price of the Baht.

Changes in relative interest rates influence the foreign exchange rates

by effecting the investment in foreign countries. If for instance (as in
Chapter 3s example of interest rate changes experienced by Blades
Inc.), Thailands interest rates increase to a more attractive rate than
the US interest rate, investors would start requiring more Thai Baht
and less US dollar in order to chase the return potential in Thai
investments. This means the demand for Thai Baht will shift upwards,
raising its value, while at the same time lowering its supply as more
Baht is taken off the market. This means that more US dollars are
available, and at a lower price. This will drop the equilibrium price of
dollar to Baht exchange.

A third factor is Relative Income levels. Income levels for a particular

country have the ability to effect consumer purchasing power, which
leads to less demand for imported goods, and ultimately effects
exchange rates. Say the US income level rises substantially against the
British income level. The demand for British pounds would shift
upwards and out as the demand for British pounds increases together
with demand for goods. Because a rising income level will not compel

Britain to change its need for dollars, the supply of pounds for sale will
not be effected, resulting in a rise of the exchange rate for pounds.

Government controls have the ability to effect exchange rates. The

government is able to impose foreign exchange barriers, impose
foreign trade barriers, intervene on the financial markets, and affect
inflation, interest rate, and income levels. The government has the
ability to correct spot rate prices by making once-lucrative, local
investments much less lucrative by imposing various taxing policies.

Expectations have the ability to alter the way traders of currency

invest in foreign exchanges. For instance, if the expectation of a
countries economy is favorable, investors may take a position in that
countries investments, thereby raising the demand for that currency
over time, and profiting off the appreciated value of the currency. The
opposite trend is true for an unfavorable expectation of a countries
financial future.

Interaction of Factors occurs when several financial or trade related

factors combine to form a phenomena that would effects exchange
rates. If, for instance, the US experienced high inflation and increased
interest rates compared to a stable Thai Baht, the result would be a
rise in the demand for Baht (as a result of increased imports due to
inflation), but at the same push the Bahts value down as investment

prospects present themselves in forms of higher interest rates in the

US.

Most countries and zones are related to each other in terms of financial
prosperity or recession. This is one reason why factors are able to
influence currencies across multiple currency markets. It is reasonable
to assume that if a high US interest rate is deemed favorable by France
resulting in an influx of French investments then most likely Britain
and Switzerland will also find the US market enticing. As a result, one
would see downward pressure of multiple currencies against the dollar
as US investments are made.

The liquidity of a market refers to the number of buyers and sellers

available to convert goods to cash or one currency to another. If a
market is liquid, its spot rate will not be susceptible to a single large
purchase of its currency. The opposite is true of an illiquid market. In
terms of equilibrium, if a rush of investors purchase rubles (a rather
illiquid currency) for any particular reason, the value of rubles against
the dollar would most likely jump rapidly. Consequently, the value of
rubles will decline sharply as investors sell off.

Question 3

High levels of inflation and interest rates affect the bahts value by
making it relatively volatile relative to the U.S. dollar. Therefore, increased
inflation of the baht will place upward pressure on the U.S.D. because of its
impact on international trade. And increased baht interest rate will place
downward pressure on the U.S.D. because of impact on capital flows.
Question 4
Being a financial analyst for Blades Inc. requires to understand how all
the relevant parts interplay with each other. One part may be the confidence
level in the Thai baht which impacts the value of the currency; another one is
the effect of the currency devaluation on the success of the company, or at
least on its revenues from Thai importers. As investors decide to move their
investments to more profitable opportunities in stable economies, an
increased amount of Thai bahts follow the unchanged number of goods of
the foreign country resulting in further depreciation of the Thai baht. For
Blades Inc., the Thai baht depreciation have a negative effect on the
companys revenues as sales are converted to U.S. dollars (USD). In a
nutshell, Blades receives less USD in exchange for sales made by Thai
importers because the company invoices in the foreign currency, differently
than its U.S. exporter competitors that require USD in exchange of their
products.

Chapter 5

Question 1
Blades Inc., has two options they can take option 1 with a lower
exercise price of .00756 which is 5% over the spot rate and has a higher
premium of 2.0%; or they can go with option 2 that has a higher exercise
price of .00792(10% over spot rate) but premium is lower at 1.5%. The trade
off in this situation is paying a lower exercise price or paying a lower
premium. I would personally advise Blades Inc., to take option 1, the cost
savings is more beneficial in paying a lower exercise rate than paying a lower
premium in this situation because it is a large transaction. In option 1 total
amount for cost of buying yen including premium is $96,390, as opposed to
$100,417.50 for option 2, which also includes premium. Choosing option one
lowers payables to $96,390, which is a difference of $4,027.50. So paying a
higher premium is more beneficial than paying a higher exercise rate in this
scenario.
Question 2
I would advise Blades to continue to hedge and not allow its yen
position to remain un-hedged. Due to recent events that caused premium
rates to increase, I would advise Blades Inc., to hedge their future payables
because the spot rate for the Yen might increase in the future due to more
uncertainties and just risk paying a more expensive premium than risk
paying higher payables. I recommend this due to the large amounts in the

transactions, but I would also recommend blades Inc., look into a futures
contract as well.
Question 3
The expected spot rate at the delivery date is equal to the future rate,
which is .006912; if market expectations are that the yen will appreciate,
than speculators will buy future contracts and sell them at the new spot rate.
This will cause downward pressure on the expected future rate, until it is
equal to the future spot rate.
Question 4
The best option based on cost by delivery date is to purchase a futures
contract, which total cost is $86,400; remaining un-hedged also costs
$86,400, but in real life scenario actual costs on delivery date could increase
or decrease dramatically due to the movement of the yen, so purchasing a
futures contract would be the safest and most efficient choice in this
scenario.

Unhedged

Expected Spot Rate

Amount of Yen Payables

Cost in Two Months

$ 0.006912 x

12,500,000

$ 86,400.00

Buy a One Futures Contract

Futures Price per Unit

Units in Contract

Cost in Two Months

$ 0.006912 x

12,500,000

$ 86,400.00

Purchase Two Options

Options Information

Option 1

Option 2

Exercise Price

$.0075600

$0.0079200

Premium per Unit

$.0001512

$0.0001134

Units in Contract
6,250,000

6,250,000

Cost of Premium

Total Cost w/o Premium

Total cost with Premium

$1,890

$86,400.00

$1,417.50

$86,400.00

$88,290

$87,817.50

Chapter 6
Question 1
The intervention effort by the Thai government constituted a direct
intervention. The reason why it is a direct intervention is because they
exchanged baht held in reserve and they were with dollars. They then
purchased baht in the foreign market which makes it a direct intervention.
The reason why they did this was to try to increase the demand for baht in
the economy and try raise the equilibrium value.
Question 2
The intervention by the Thai government constituted a nonsterilized
intervention. The reason is because the intervention did not offset the effects
on the baht supply at the same time it took place. Also, they used the dollar

reserves to purchase baht from the foreign exchange market without selling
Thai government securities to counteract the decrease the bahts supply.
Sterilized intervention is when the Fed intervenes in the foreign exchange
market and simultaneously engages in offsetting transactions in the Treasury
securities markets. This causes the dollar money supply is unchanged.
Nonsterilized intervention is when the Fed intervenes in the foreign exchange
market without adjusting for the change in the money supply.
I believe that the sterilized intervention would be more effective in increasing
the value of the baht because it reverses anything that may cause an
effective on the currencys supply which eliminates any inflation effects. This
also can reduce the bond prices and the interest rates because they work
inversely with each other.

Question 3
Before further information is given, it is important to define a fixed
exchange rate system, also known as pegged exchange rate. There are
countries that have their currency tied to another countrys currency in an
effort to maintain its exchange rate within a certain level. Benefits of this

particular system include maintain low inflation levels and possibly increases
in international trade and investments among countries.
In the case of Blades Inc., however, the opposite applies to the
American company as Thailand currently experiences high inflation levels.
Lets first analyze the effects of high inflation in the Thai market. As
consumers in the foreign country have to pay higher price tags [in general],
the demand of U.S. products is likely to increase, which causes inflation in
the United States to rise more demand for USD drives this increase in the
American economy. Now, take the United States into consideration. Because
inflation is higher in the foreign country, there are probably less American
importers buying from Thai markets. This reality causes less products to be
manufactured in Thailand, having an impact on unemployment levels of the
country. To conclude, it is probably the case that high inflation rates in the
Thai economy will end up affecting the American economy.
Question 4
In a freely floating exchange rate system, exchange rates are
determined by market forces without the intervention of governments. Like
the name suggests, freely floating exchange rate systems allow for complete
flexibility as a result of markets. Like many micro-markets, the floating
exchange rate continually adjusts in response to demand and supply
conditions for currency.

The floating exchange rate has a negative effect on its the local
consumer market in the way that companies are able to raise prices without
losing customers this being true because competition from foreign markets
is eliminated if negative market forces effect the local currency. For instance,
if in the near future Thailand experiences inflation, the value of the Baht may
decrease as well as insulate foreign markets from the inflation. Essentially,
this would lead to the local consumer market not being able to afford
imported goods and being forced to purchase local goods. When this occurs,
the local suppliers are able to raise prices, thus making goods much more
expensive for the local buyers.
On the other hand, if Thailand started experiencing higher
unemployment, the demand for imports would decrease (such as goods from
Blades Inc.) and the value of the Thai Baht would increase. A stronger Thai
currency would then result in a greater demand for foreign goods (as it
becomes cheaper to import with a stronger economy), and in turn hurt the
local economy, which would further add to the original unemployment issue.
It is with these examples that one can see how floating exchange rates
can multiply problems instead of manage them. Companies are affected by
freely floating exchange rates in the sense that it is very difficult to curb the
volatility of the market and make accurate future predictions. Because the
floating exchange rate is so susceptible to market forces, companies will
need to make sure they are hedged against any future movement in the

market caused by any number of factors. The government, with its access to
huge amounts of cash and resource reserves, generally acts as a regulating
body in a well-functioning market. With the absence of government
intervention to stimulate or manage the value of a currency, a company
would have to take its own measures to safeguard its cash flow / reserves.
As a multinational corporation doing business in a floating exchange
rate economy, Blades does in fact contribute to the issues surrounding this
type of exchange, if only indirectly. The fact that Blades is a player in the
market means they are able to influence prices of commodities and finished
goods entering and exiting the market. They exploit the cost effective
resources that Thailand has to offer, while essentially (at least in the case of
Blades inc.) investing their profits in the US market. However, Blades does
provide advantages to the Thai economy by facilitating employment as well
as a strengthening of the Thai currency when it purchases raw materials.