Kishan Singh Laishram Chapter 10 Blades Case

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Q1.

Blades is subject to transaction and economic exposure, but is not subject

to translation exposure. Transaction exposure is the degree to which the value of future cash transactions can be affected by exchange rate fluctuations. Economic exposure is the degree to which a firms present value of future cash flows can be influenced by exchange rate fluctuation.

Q3.

If Blades does not enter into the agreement with the British firm but

continues its current importing and exporting practices in Asia, the increased correlations between the Japanese yen and the Thai baht will reduce Blades level of transaction exposure. This is because Blades generates net inflows denominated in Thai baht but net outflows denominated in Japanese Yen.

Q4.

Importing components from Japan would probably not be a good way to

reduce Blades transaction exposure in the long run. Although the correlation between the Thai baht and the Japanese yen is currently quite high, it has been low and unstable in the past. Once the current economic problems that caused the currently high correlation subside, the correlation between the two currencies will probably return to its normal levels. Since Blades only reduces its net transaction exposure by importing from Japan because of the high correlation between the two currencies, Blades net transaction exposure may actually increase once the correlation between the baht and the yen returns to normal levels.

Q5.

If Blades enters into the agreement with Jogs Ltd., its overall level of

transaction exposure would increase because the resulting transactions would increase Blades net cash inflows denominated in foreign currencies. However, the increase in transaction exposure is probably not too high, since the correlations between the two Asian currencies and the British pound are relatively low. However, this reduction would be offset by increased dollar revenue from Thailand, even though Blades dollar costs incurred due to Japanese imports would also increase

Q6.

Blades U.S. sales were likely negatively affected by the depreciation of the

baht since several Thai manufacturers located in Thailand have begun targeting the U.S. roller blade market. This is because Blades U.S. customers can obtain foreign roller blades more cheaply with a strengthened dollar. Blades imports from Thailand were probably affected positively by a depreciation of the baht, as fewer dollars were needed to obtain the baht to pay for the imports. Since the correlation between the baht and the yen has been high, the yen probably also depreciated, leading to reduced dollar costs for Blades to pay for the Japanese imports.