Global Citizens Assignment

Instruction:
Suppose that, as a financial analyst, you are tasked with evaluating Blades, a U.S. manufacturer of roller blades.
In the assignment, you provide the chief financial officer (CFO) of Blades a better understanding of the process of
government intervention and its impact on Blades’ international business. The company generates most of its
revenue and incurs most of its expenses in the United States. However, it has recently begun exporting roller
blades to Thailand. You will provide a report that includes your assessment of the Thai government intervention
and its impact on the exchange rate of baht. You are asked to analyze the following issues and provide solutions
to Blades.
• Discuss whether the intervention effort by the Thai government constitute direct or indirect intervention.
• Discuss whether the intervention by the Thai government constitute sterilized or nonsterilized intervention
and the difference between the types of intervention.
• Which type of government intervention (sterilized vs. nonsterilized) do you think would be more effective in
increasing the value of the baht? Once you choose one of the types, please justify your answer.
• If the Thai baht is virtually fixed with respect to the dollar, what would happen to the U.S. levels of inflation?
Will U.S. inflation rate go up or down, or remain unchanged? Please justify your answer.
• 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?
• What do you think will happen to the Thai baht’s value when the swap arrangement is reversed later?
• Do you have any other suggestions to Mr. Holt with regard to Blades’ business in this circumstance?
• You need to limit your report to two pages using single space and normal font size.
• Write a question-answer paper, not a continuous essay.
• No need for a coverage page.
• If you use any external sources, please be sure to provide the cites.
Case:
Blades, Inc.:
Blades has an agreement with Entertainment Products, Inc., a Thai importer, for a 3-year period.
According to the terms of the agreement, Entertainment Products will purchase 180,000 pairs of “Speedos,”
Blades’ primary product, annually at a fixed price of 4,594 Thai baht per pair. Due to quality and cost
considerations, Blades is also importing certain rubber and plastic components from a Thai exporter. The cost of
Dr. Tina Yang, Department of Finance, Muma College of Business, University of South Florida Page 2 of 3
these components is approximately 2,871 Thai baht per pair of Speedos. No contractual agreement exists between
Blades, Inc., and the Thai exporter. Consequently, the cost of the rubber and plastic components imported from
Thailand is subject not only to exchange rate considerations but to economic conditions (such as inflation) in
Thailand as well.
Shortly after Blades began exporting to and importing from Thailand, Asia experienced weak economic
conditions. Consequently, foreign investors in Thailand feared the baht’s potential weakness and withdrew their
investments, resulting in an excess supply of Thai baht for sale. Because of the resulting downward pressure on
the baht’s value, the Thai government attempted to stabilize the baht’s exchange rate. To maintain the baht’s
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. However, this agreement required Thailand to reverse this transaction by exchanging dollars for
baht at a future date. Unfortunately, the Thai government’s intervention was unsuccessful, as it was overwhelmed
by market forces. Consequently, the Thai government ceased its intervention efforts, and the value of the Thai
baht declined substantially against the dollar over a 3-month period.
When the Thai government stopped intervening in the foreign exchange market, Ben Holt, Blades’ CFO,
was concerned that the value of the Thai baht would continue to decline indefinitely. Since Blades generates net
inflow in Thai baht, this would seriously affect the company’s profit margin. Furthermore, one of the reasons
Blades had expanded into Thailand was to appease the company’s shareholders. At last year’s annual shareholder
meeting, they had demanded that senior management take action to improve the firm’s low profit margins.
Expanding into Thailand had been Holt’s suggestion, and he is now afraid that his career might be at stake. For
these reasons, Holt feels that the Asian crisis and its impact on Blades demand his serious attention. One of the
factors Holt thinks he should consider is the issue of government intervention and how it could affect Blades in
particular. Specifically, he wonders whether the decision to enter into a fixed agreement with Entertainment
Products was a good idea under the circumstances. Another issue is how the future completion of the swap
agreement initiated by the Thai government will affect Blades. To address these issues and to gain a little more
understanding of the process of government intervention, Holt has prepared the following list of questions for
you, Blades’ financial analyst, since he knows that you understand international financial management