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In the partial fulfillment of the subject International FinancialManagement

Under the Guidance ofProf. Sushil Mohanty

S. V. Institute of Mana ement Kadi

APresentation

onCase study Blades, Inc .

Team MembersRinku Patel

Meghna DaveRashmika Gothi

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Ben Holt, Blades (CFO) believes the sport productmarket in Asia has very high future growth potential,Blades has recently begun exporting to Jogs, Ltd.

Jogs has committed to purchase 2,00,000 pairs ofSpeedos annually for a fixed price of 80 pound per pair.

Blades expects to import from Thailand to manufacture80,000 pairs of Speedos, at a cost of approximately

3000 baht per pair of Speedos. The high level of consumer spending on leisure

products such as roller blades has declined and the Thairetailer may not renew its commitment with Blades in 2years which it affects negatively.

Cont .

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Ben Holt convinced that Southeast Asia will exhibithigh potential for growth when the impact of recentevents in Asia subsidies.

Holt is not considering all of the factors that mightdirectly or indirectly affect Blades and he is ignoringBlades future in Thailand even if the Thai importerrenews its commitment for another 3 years.

Blades has forecasted sales in US of 520,000 pairs ofSpeedos; exports to Thailand of 180,000 pairs ofSpeedos for 4,594 baht a pair; and exports to the UKof 200,000 pairs of Speedos for 80 pound per pair.

Cont.

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If the Thai customer renews its commitment foranother three years, the price Blades receives in bahtwould continue to be fixed.

Conversely, Blades cost of goods sold incurred inThailand would be subject to the high level ofinflation in Thailand.

In addition, the high inflation may cause the baht todepreciate, which would reduce the dollars receivedfrom baht-denominated sales to Thailand.

Answer

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Holt believes that the Thai importer will renew its

commitment in two years. Do you think his assessment

is correct? Why or why not? Also, assume that the Thai

economy returns to the high growth level that existed

prior to the recent unfavorable economic events. Under

this assumption, how likely is it that the Thai importer

will renew its commitment in two years?

Question 2

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Before renewing its commitment to purchase a fixednumber of products at a fixed price from Blades, theThai importer would have to assess the advantages anddisadvantages of such an arrangement.

If the Thai level of inflation continues to be high, theretailer has the advantage of incurring costsdenominated in baht that are not subject to the high

level of inflation. However, if consumers in Thailand continue to reduce

their spending on leisure products, the Thai firm maynot be able to sell all of the products it has purchased

from Blades.

Answer

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If the Thai economy returns to a high growth level, theThai customer will probably renew its commitment.

This is because it can be reasonably certain that it willsell all of the products it has committed itself topurchase from Blades. Furthermore, the costs it incursare still not subject to the high level of inflationprevailing in Thailand.

Cont..

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For each of the three possible values of the

Thai baht and the British pound, use aspreadsheet to estimate cash flows for the next

year. Briefly comment on the level of Blades

economic exposure. Ignore possible tax effects.

Question 3

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THB=$0.0220

BP=$1.530 THB=$0.0209

BP=$1.485 THB=$0.0198

BP=$1.500

Sales

(1) U.S. (520,000 units $120/pair) $6,24,00,000 $6,24,00,000 $6,24,00,000(2) Thai (180,000 units THB4,594

Exchange Rate) $1,81,92,240 $1,72,82,628 $1,63,73,016

(3) British (200,000 units 80 pounds Exchange Rate) $2,44,80,000 $2,37,60,000 $2,40,00,000

(4) Total $10,50,72,240 $10,34,42,628 $10,27,73,016Cost of materials:

(5) U.S. ([900,000 80,000] units $70) $5,74,00,000 $5,74,00,000 $5,74,00,000(6) Thai (80,000 units THB3,000

Exchange Rate) $52,80,000 $50,16,000 $47,52,000

(7) Total $6,26,80,000 $6,24,16,000 $6,21,52,000Operating Expenses:

(8) U.S.: Fixed $20,00,000 $20,00,000 $20,00,000

(9) U.S.: Variable (11% of U.S. sales) $68,64,000 $68,64,000 $68,64,000

(10) Total

$88,64,000 $88,64,000 $88,64,000(11) Net cash flow $3,35,28,240 $3,21,62,628 $3,17,57,016

Cont..

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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?

Question 4

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BP=$1.50 BP=$1.425 BP=$1.350 Sales

(1) U.S. (520,000 units $120/pair) $6,24,00,000 $6,24,00,000 $6,24,00,000(2) Thai (180,000 units THB4,594 Exchange

Rate) $1,81,92,240 $1,72,82,628 $1,63,73,016

(3) British (200,000 units 80 pounds ExchangeRate) $2,40,00,000 $2,28,00,000 $2,16,00,000

(4) Total

$10,45,92,240 $10,24,82,628 $10,03,73,016Cost of materials:

(5) U.S. ([900,000 80,000] units $70) $5,74,00,000 $5,74,00,000 $5,74,00,000(6) Thai (80,000 units THB3,000 Exchange

Rate) $52,80,000 $50,16,000 $47,52,000

(7) Total $6,26,80,000 $6,24,16,000 $6,21,52,000Operating Expenses:

(8) U.S.: Fixed $20,00,000 $20,00,000 $20,00,000

(9) U.S.: Variable (11% of U.S. sales) $68,64,000 $68,64,000 $68,64,000(10) Total $88,64,000 $88,64,000 $88,64,000(11) Net cash flows $3,30,48,240 $3,12,02,628 $2,93,57,016

Cont..

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Based on your answers to the previous threequestions, what actions could Blades take to

reduce its level of economic exposure toThailand?

Question 5

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There are several actions Blades could take. Theanalysis above illustrates that economic exposure canbe reduced by conducting its international business incountries whose currencies are not highly correlated.

Thus, Blades could be exporting to or importing fromother countries besides Thailand and the United

Kingdom. Another action Blades could take is to borrow in baht, which would reduce the number of baht that wouldhave to be converted to dollars, as the baht receivables

could be used to repay to baht-denominated loans.

Answer

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