ANSWER: If the Thai customer renews its commitment for another three years, the price Blades receives in baht would continue to be fixed. Conversely, Blades’ cost of goods sold incurred in Thailand would be subject to the high level of inflation in Thailand. In addition, the high inflation may cause the baht to depreciate, which would reduce the dollars received from baht-denominated sales to Thailand.
2. Holt believes that the Thai importer will renew its commitment in two years. Do you think his assessment is correct? Why or why …show more content…
ANSWER: (See spreadsheet attached.) Blades, Inc. does not appear to be subject to a high level of economic exposure based on the analysis. Nevertheless, a depreciation of the Thai baht by 10 percent to an average level of $.0198 over the year would decrease its earnings before taxes by approximately 5 percent. Thus, Blades, Inc. is subject to some economic exposure. 4. Now repeat your analysis in question 3 but assume that the British pound and the Thai baht are perfectly correlated. For example, if the baht depreciates by 5 percent, the pound will also depreciate by 5 percent. Under this assumption, is Blades subject to a greater degree of economic exposure? Why or why not?
ANSWER: (See spreadsheet attached.) If the British pound and the Thai baht are perfectly correlated, Blades’ level of economic exposure increases. This is because Blades generates inflows in both pounds and baht. Under this scenario, a depreciation of the pound and the baht by10 percent would reduce Blades’ earnings before taxes by approximately 11 percent.
5. Based on your answers to the previous three questions, what actions could Blades take to reduce its level of economic exposure to Thailand?
ANSWER: There are several actions Blades could take. The analysis above illustrates that economic exposure can be reduced by conducting its international business in countries whose