CH 6

A
Presentation
On
Case study of
Blades, Inc.
(Assessment of government influence on Exchange Rates)
Under the Subject
International Corporate finance

Submitted To:
Prof. Sushil Mohanty

Submitted By:
Anuradha Jangid
Sonal Thakkar
Jignesh Chauhan

OVERVIEW OF CASE
Blades, Inc. is basically U.S. based company.
The company is producing roller blades, generates most of its
revenue and incurs most of its expenses in the U.S.
Recently, company has begun exporting roller blades to
Thailand, and has an agreement with Entertainment Products,
Inc., a Thai Importer, for 3 years period.
According to the terms of the agreement, Entertainment
Products will purchase 180,000pairs of blades annually at a
fixed price of 4,594 Thai baht per pair.
Due to quality and cost consideration, Blades is also importing
certain rubber and plastic components from a Thai exporter.
No contractual agreement exists between Blades, Inc., and Thai
exporter.
The cost of rubber and plastic components imported from
Thailand is subjected not only to exchange rate considerations
but to economic conditions like Inflation in Thailand as well.
Shortly after Blades began exporting to and importing from
Thailand, Asia experienced weak economic conditions.
Thai government attempted to stabilize the bahts exchange rate.
To maintain the bahts value, the Thai government intervened in the
foreign exchange market.
Specifically, it swapped its baht reserves for dollar at other central
banks and then used its dollar reserves to purchase the baht in the
foreign exchange market.
Unfortunately, the Thai governments intervention was unsuccessful,
as it overwhelmed by market forces.
Another reason for expanding in Thailand was, shareholders had
demanded to improve the firms low profit margins.
Expansion was the decision of CFO , so he is now afraid that
his career might be at stake.
He wonders whether the decision to enter into a fixed
agreement with entertainment products was a good idea under
this circumstances.
Another issue is how the future completion of the swap
agreement initiated by the Thai government will affect the
company.

1. Did the intervention effort by the Thai government constituted
direct or Indirect intervention ? Explain.
The intervention done by Thai government is direct
intervention.
Direct intervention means to force the dollar to depreciate, the
central bank can intervene directly by exchanging dollars that it
holds as reserves for other currencies in the foreign exchange
market.
The potential effectiveness of a central banks direct
intervention is the amount of reserves it can use.

To maintain the bahts 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.

2. Did the intervention by the Thai government constitute
sterilized or nonsterilized intervention? What is the difference
between the two types of intervention? Which type do you think
would be more effective in increasing the value of the baht?
Why?
The intervention by the Thai government is nonsterilized
intervention.
Nonsterilized intervention
Dollar
Thai Baht

Federal Reserve
Banks participating in
Foreign exchange
Market
Sterilized intervention:

To increase the value of baht, sterilized intervention would be
more effective, because it involves an additional transaction to
prevent adjustment in the U.S. dollar money supply.

Federal Reserve
Banks participating in
Foreign exchange
Market
Dollar
Thai Baht
Financial
Institutions that
invest in
Treasury
Securities
Treasury Securities
3. If the Thai baht is virtually fixed with respect to the dollar, how
could this affect U.S levels of inflation? Do you think these effects
on the U.S economy will be more pronounced for companies such
as Blades that operate under trade arrangements involving
commitments or for firms that do not? How are companies such as
Blades affected by a fixed exchange rate?
Yes, it will affect to U.S. economy.
If the U.S experiences a much higher inflation rate than Thailand,
U.S consumer should buy more goods from the Thailand.

Thailand consumer should reduce their import of U.S goods,
due to the high U.S Prices.
This reaction would force U.S production down and
unemployment will goes up and it will weaken U.S economy,
and vise- a- versa.
As U.S based company Blades that operates under trade
arrangements involving commitments with Thailand, so it
will directly affect to them compare to those which are not
having commitment for the same.
If fixed exchange rate exist between this two countries than
there are more advantages than disadvantages. Like,

1. Trade with less concern about exchange rate movements of
currency.
2. Being exporter, that accept the foreign currency. There will be
less risk that currency could depreciate over time.
3. Being importer, there will be less concern about the risk of the
currency appreciating over time.
4. Disadvantage of fixed exchange rate system is that, there is
risk that government will alter the value of specific currency.
It does face that central bank may devalue or revalue its
currency.
5. More vulnerability of economic condition of other countries.

4. What are some of the potential disadvantages for Thai levels of
inflation associated with the floating exchange rate system that is
now used in Thailand ? Do you think Blades contributes to this
disadvantages to a great extend? How are companies such as
Blades affected by a freely floating exchange rate.?
As per case, floating exchange rate system is now used in
Thailand. So, there are some of the potential disadvantages for
Thailand.
According to this case, Asia experienced weak economic
conditions, so foreign investors in Thailand feared the bahts
potential weakness and withdraw their investments.

Resulting downward pressure on the bahts value.
Even Thai governments intervention was unsuccessful and it
continued to decline baht over a three months period.
If level of inflation in Thailand increases baht will decline.
Effects on Blades, Inc.:
1. If value of the Thai baht will continue to decline, it will
adversely affects to Blades as its net inflow generates in Thai
baht. So that, this would affect companys profit margin.

5. What do you think will happen to the Thai bahts value when the
swap arrangement is completed? How will this affect Blades?
When swap arrangement is completed, Thai Baht value will
increase.
Specifically, it swapped its Baht reserves for Dollar reserve at
other central banks and then used its dollar reserves to purchase
the bahts in foreign exchange market.
So, this will leads to increase the value of Thai baht.
completion of this swap agreement will positively affect to blade
as price of the baht will increase, so overall profit margin of
Blades will increase.

Thank You.!

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