In the partial fulfillment of the subject International Financial

Management

Under the Guidance of
Prof. Sushil Mohanty






S. V. Institute of Management, Kadi
A
Presentation
on
Case study Blades, Inc.
Team Members
Rinku Patel
Meghna Dave
Rashmika Gothi
Blades, Inc. has been exporting to Thailand and has
recently begun exporting to a retailer in the UK. The
suppliers of Blades are located in the US and Thailand.
Blades decided to use Thai suppliers to manufacture
roller blades because of cost and quality considerations.
Blades found an importer in Thailand who want to
purchase 1,80,000 pairs of Blades Speedos annually,
which are among the highest quality roller blades in the
world.
Due to this commitment, Blades is selling its roller
blades for 4,594 baht per pair instead of the $120 per
pair.
About Case
Ben Holt, Blades (CFO) believes the sport product
market 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 of
Speedos annually for a fixed price of 80 pound per pair.
Blades expects to import from Thailand to manufacture
80,000 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 Thai
retailer may not renew its commitment with Blades in 2
years which it affects negatively.
Cont.
Ben Holt convinced that Southeast Asia will exhibit
high potential for growth when the impact of recent
events in Asia subsidies.
Holt is not considering all of the factors that might
directly or indirectly affect Blades and he is ignoring
Blades future in Thailand even if the Thai importer
renews its commitment for another 3 years.
Blades has forecasted sales in US of 520,000 pairs of
Speedos; exports to Thailand of 180,000 pairs of
Speedos for 4,594 baht a pair; and exports to the UK
of 200,000 pairs of Speedos for 80 pound per pair.
Cont.
Question 1
How will blades be negatively affected by the
high level of inflation in Thailand if the Thai
customer renews its commitment for another
three years?
If the Thai customer renews its commitment for
another three years, the price Blades receives in baht
would continue to be fixed.
Conversely, Blades cost of goods sold incurred in
Thailand would be subject to the high level of
inflation in Thailand.
In addition, the high inflation may cause the baht to
depreciate, which would reduce the dollars received
from baht-denominated sales to Thailand.
Answer
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
Before renewing its commitment to purchase a fixed
number of products at a fixed price from Blades, the
Thai importer would have to assess the advantages and
disadvantages of such an arrangement.
If the Thai level of inflation continues to be high, the
retailer has the advantage of incurring costs
denominated 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 may
not be able to sell all of the products it has purchased
from Blades.
Answer
If the Thai economy returns to a high growth level, the
Thai customer will probably renew 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. Furthermore, the costs it incurs
are still not subject to the high level of inflation
prevailing in Thailand.
Cont..
For each of the three possible values of the
Thai baht and the British pound, use a
spreadsheet to estimate cash flows for the next
year. Briefly comment on the level of Blades
economic exposure. Ignore possible tax effects.
Question 3
Blades, Inc. does not appear to be subject to a high
level of economic exposure based on the analysis.
Nevertheless, a depreciation of the Thai baht by 10
percent to an average level of $.0198 over the year
would decrease its earnings before taxes by
approximately 5 percent.
Thus, Blades, Inc. is subject to some economic
exposure.
Answer

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 $10,27,73,016
Cost 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 $6,21,52,000
Operating 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..
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
If the British pound and the Thai baht are
perfectly correlated, Blades level of economic
exposure increases.
This is because Blades generates inflows in
both pounds and baht.
Under this scenario, a depreciation of the
pound and the baht by 10 percent would
reduce Blades net cash flows by
approximately 11 percent.
Answer
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 Exchange
Rate)
$2,40,00,000 $2,28,00,000 $2,16,00,000
(4) Total $10,45,92,240 $10,24,82,628 $10,03,73,016
Cost 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 $6,21,52,000
Operating 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..
Based on your answers to the previous three
questions, what actions could Blades take to
reduce its level of economic exposure to
Thailand?
Question 5
There are several actions Blades could take. The
analysis above illustrates that economic exposure can
be reduced by conducting its international business in
countries whose currencies are not highly correlated.
Thus, Blades could be exporting to or importing from
other 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 would
have to be converted to dollars, as the baht receivables
could be used to repay to baht-denominated loans.
Answer
The borrowed funds could then be converted to dollars
to pay for U.S. supplies. However, the high level of
interest rates may not make this a feasible alternative.
To further reduce its economic exposure, Blades could
also buy more supplies from Thailand instead of the
U.S. in order to create more cash outflows in baht.
This would further reduce the level of economic
exposure, as more baht revenues could be used to buy
Thai supplies.
However, the success of this approach depends on the
impact of the high level of inflation in Thailand on
market prices for the imported components.
Cont..