As the chief financial officer of Blades, Inc., Ben Holt ispleased that his current system of exporting "Speedos" to Thailandseems to be working well. Blades' primary customer in Thailand, aretailer called Entertainment Products, has committed itself topurchasing a fixed number of Speedos annually for the next 3 yearsat a fixed price denominated in baht, Thailand's currency.Furthermore, Blades is using a Thai supplier for some of thecomponents needed to manufacture Speedos. Nevertheless, Holt isconcerned about recent developments in Asia. Foreign investors fromvarious countries had invested heavily in Thailand to takeadvantage of the high interest rates there. As a result of the weakeconomy in Thailand, however, many foreign investors have lostconfidence in Thailand and have withdrawn their funds. Holt has twomajor concerns regarding these developments. First, he is wonderinghow these changes in Thailand's economy could affect the value ofthe Thai baht and, consequently, Blades. More specifically, he iswondering whether the effects on the Thai baht may affect Bladeseven though its primary Thai customer is committed to Blades overthe next 3 years. Second, Holt believes that Blades may be able tospeculate on the anticipated movement of the baht, but he isuncertain about the procedure needed to accomplish this. Tofacilitate Holt's understanding of exchange rate speculation, hehas asked you, Blades' financial analyst, to provide him withdetailed illustrations of two scenarios. In the first, the bahtwould move from a current level of $.022 to $.020 within the next30 days. Under the second scenario, the baht would move from itscurrent level to $.025 within the next 30 days. How are percentagechanges in a currency's value measured? Illustrate your answernumerically by assuming a change in the Thai baht's value from avalue of $.022 to $.026. What are the basic factors that determinethe value of a currency? In equilibrium, what is the relationshipbetween these factors?
As the chief financial officer of Blades, Inc., Ben Holt ispleased that his current system of exporting "Speedos" to Thailandseems to be working well. Blades' primary customer in Thailand, aretailer called Entertainment Products, has committed itself topurchasing a fixed number of Speedos annually for the next 3 yearsat a fixed price denominated in baht, Thailand's currency.Furthermore, Blades is using a Thai supplier for some of thecomponents needed to manufacture Speedos. Nevertheless, Holt isconcerned about recent developments in Asia. Foreign investors fromvarious countries had invested heavily in Thailand to takeadvantage of the high interest rates there. As a result of the weakeconomy in Thailand, however, many foreign investors have lostconfidence in Thailand and have withdrawn their funds. Holt has twomajor concerns regarding these developments. First, he is wonderinghow these changes in Thailand's economy could affect the value ofthe Thai baht and, consequently, Blades. More specifically, he iswondering whether the effects on the Thai baht may affect Bladeseven though its primary Thai customer is committed to Blades overthe next 3 years. Second, Holt believes that Blades may be able tospeculate on the anticipated movement of the baht, but he isuncertain about the procedure needed to accomplish this. Tofacilitate Holt's understanding of exchange rate speculation, hehas asked you, Blades' financial analyst, to provide him withdetailed illustrations of two scenarios. In the first, the bahtwould move from a current level of $.022 to $.020 within the next30 days. Under the second scenario, the baht would move from itscurrent level to $.025 within the next 30 days. How are percentagechanges in a currency's value measured? Illustrate your answernumerically by assuming a change in the Thai baht's value from avalue of $.022 to $.026. What are the basic factors that determinethe value of a currency? In equilibrium, what is the relationshipbetween these factors?
