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21127, Ahmad, Assignment 5, IF

The document discusses factors that determine currency values like supply and demand, and how high inflation and interest rates in Thailand could affect the value of the Thai baht relative to the US dollar. It also addresses how a loss of confidence in the baht evidenced by fund withdrawals from Thailand would likely cause the currency to depreciate. The treasurer of Blades Inc. is instructed to construct a spreadsheet to speculate on possible movements in the baht over 30 days under different scenarios.

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203 views5 pages

21127, Ahmad, Assignment 5, IF

The document discusses factors that determine currency values like supply and demand, and how high inflation and interest rates in Thailand could affect the value of the Thai baht relative to the US dollar. It also addresses how a loss of confidence in the baht evidenced by fund withdrawals from Thailand would likely cause the currency to depreciate. The treasurer of Blades Inc. is instructed to construct a spreadsheet to speculate on possible movements in the baht over 30 days under different scenarios.

Uploaded by

muhammad ahmad
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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National University of Modern Languages

Lahore Campus
Topic:
Chapter 4, Case study, Blades. Inc.
Subject:
International Finance
Submitted To:
Dr. Muhammad Imad-ud-Din Akbar
Submitted by:
Muhammad Ahmad
Roll Number:
L-21127
Class (shift):
MBA-VI (M)
1. How are percentage changes in a currency’s value measured? Illustrate your answer
numerically by assuming a change in the Thai baht’s value from a value of $.022 to $.026.
Percentage Change = (S - St-1)/St-1
= (.026-.022)/.022
= .1818
=18.18%

2. What are the basic factors that determine the value of a currency? In equilibrium, what is the
relationship between these factors?

ANSWER: The basic factors that determine the value of a currency are the supply of the
currency for sale and the demand for the currency. A high level of supply of a currency
generally decreases the currency’s value, while a high level of demand for a currency increases
its value. In equilibrium, the supply of the currency equals the demand for the currency.

3. How might the relatively high levels of inflation and interest rates affect the baht’s value?
(Assume a constant level of U.S. inflation and interest rates.)

ANSWER: The baht would be affected both by inflation levels and interest rates in Thailand
relative to levels of these variables in the U.S. A high level of inflation tends to result in currency
depreciation, as it would increase the Thai demand for U.S. goods, causing an increase in the
Thai demand for dollars. Furthermore, a relatively high level of Thai inflation would reduce the
U.S. demand for Thai goods, causing an increase in the supply of baht for sale.
Conversely, the high level of interest rates in Thailand may cause appreciation of the baht
relative to the dollar. A relatively high level of interest rates in Thailand would have rendered
investments there more attractive for U.S. investors, causing an increase in the demand for
baht. Furthermore, U.S. securities would have been less attractive to Thai investors, causing an
increase in the supply of dollars for sale. However, investors might be unwilling to invest in
baht-denominated securities if they are concerned about the potential depreciation of the baht
that could result from Thailand’s inflation.

4. How do you think the loss of confidence in the Thai baht, evidenced by the withdrawal of
funds from Thailand, will affect the baht’s value? Would Blades be affected by the change in
value, given the primary Thai customer’s commitment?
ANSWER: In general, depreciation in the foreign currency results when investors liquidate their
investments in the foreign currency, increasing the supply of its currency for sale. Blades would
probably be affected by the change in value, as the sales are denominated in baht. Thus, the
depreciation in the baht would have caused a conversion of the baht revenue into fewer U.S.
dollars.

5. Assume that Thailand’s central bank wishes to prevent a withdrawal of funds from its country
in order to prevent further changes in the currency’s value. How could it accomplish this
objective using interest rates?
ANSWER: If Thailand’s central bank wishes to prevent further depreciation in the baht’s value, it
would attempt to increase the level of interest rates in Thailand. In turn, this would increase the
demand for Thai baht by U.S. investors, as Thai securities would now seem more attractive. This
would place upward pressure on the currency’s value. However, the high interest rates could
educe local borrowing and spending.

6. Construct a spreadsheet illustrating the steps Blades’ treasurer would need to follow in order
to speculate on expected movements in the baht’s value over the next 30 days. Also show the
speculative profit (in dollars) resulting from each scenario. Use both of Ben Holt’s examples to
illustrate possible speculation. Assume that Blades can borrow either $10 million or the baht
equivalent of this amount. Furthermore, assume that the following short-term interest rates
(annualized) are available to Blades:
ATE
Currency lending Borrowing
Thai baht 14.80% 15.40%

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