Blades, Inc. Assessment of Economic Exposure
1. How will Blades be negatively affected by the high level of inflation in Thailand if the Thai customer renews its commitment for another 3 years?
Changes in exchange rates expose an MNC to currency risk. Inflation has a direct relation to exchange rates and these changes affect a firm’s competitiveness, increases or decreases sales revenue, affects the cost of goods sold, input prices, operating profits, market share, stock price, etc. all these are referred to as a firm’s economic exposure.
According to the contract, Blades, Inc. USA sells 180,000 pairs of Blades speedos annually to the importer. ...view middle of the document...
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?
Renewing the contract after the expiration period has advantages and disadvantages for the importer. If the contract is renewed, the importer will have some cost benefit over the price of the Speedos roller blades. As the contract specifies, the importer will be able to import the roller blades at the price of 4594 Baht even when the Thai economy is facing high level of inflation. So this proves as an advantage for the importer allowing him to import at a secured price; as the cost incurred by the importer is denominated in Thai Baht which is not subject to the high level of inflation. However, if the Thai economy continues through high level of inflation after the contract is renewed, the importer will be able to import products at a predetermined rate, but the high inflation may provoke consumers in Thailand to reduce their spending on leisure products. So the inflation in Thailand may lead the Thai sales towards a steady decline. Thus the Thai firm may not be able to sell all of the products it has purchased from Blades.
Renewing the contract will provide benefit to the importer over its competitors as they are prone to the high level of inflation. So the importer can attain a benefit over its competitors in the cost department. Extending the contract will also reduce the economic exposure of the importer even during inflation periods. But this will occur only when the costs incurred by the importer in Thai Baht is offset by its revenue.
Assuming that the Thai economy returns to a high growth level, there is likelihood of the Thai customer renewing its commitment. This is because it can be reasonably certain that it will sell all of the products it has committed itself to purchase from Blades.
3. For each of the three possible values of the Thai baht and the British pound, use a spreadsheet to construct a pro...