International Financial Management

ASSIGNMENT # 1
TOPIC: CASE STUDY OF CHAPTER 2 International Flow of Funds Case Problem: Blades, Inc. 1. How could a higher level of inflation in Thailand affect Blades (assume U.S. inflation remains constant)? 2. How could competition from firms in Thailand and from U.S. firms conducting business in Thailand affect Blades? 3. How could a decreasing level of national income in Thailand affect Blades? 4. How could a continued depreciation of the Thai baht affect Blades? How would it affect Blades relative to U.S. exporters invoicing their roller blades in U.S. dollars? 5. If Blades increases its business in Thailand and experiences serious financial problems, are there any international agencies that the company could approach for loans or other financial assistance?

ASSIGNMENT # 2
TOPIC: CASE STUDY & SMALL BUSINESS DILEMMA OF CHAPTER 3 International Financial Markets Case Problem: Blades, Inc. 1. One point of concern for you is that there is a tradeoff between the higher interest rates in Thailand and the delayed conversion of baht into dollars. Explain what this means. 2. If the net baht received from the Thailand operation are invested in Thailand, how will U.S. operations be affected? (Assume that Blades is currently paying 10 percent on dollars borrowed, and needs more financing for its firm.) Small Business Dilemma Use of the Foreign Exchange Markets by the Sports Exports Company 1. Explain how the Sports Exports Company could utilize the spot market to facilitate the exchange of currencies. Be specific. 2. Explain how the Sports Exports Company is exposed to exchange rate risk and how it could use the forward market to hedge this risk. CASE STUDY OF CHAPTER 6 Government Influence on Exchange Rates Case Problem: Blades, Inc. 1. Did the intervention effort by the Thai government constitute direct or indirect intervention? Explain. 2. Did the intervention by the Thai government constitute sterilized or non-sterilized intervention? What is the difference between the two types of intervention? Which type do you think would be more effective in increasing the value of the baht? Why? (Hint: Think about the effect of non-sterilized intervention on U.S. interest rates.) 3. If the Thai baht is virtually fixed with respect to the dollar, how could this affect U.S. levels of inflation? Do you think these effects on the U.S. economy will be more pronounced for companies such as Blades that operate under trade arrangements involving commitments or for firms that do not? How are companies such as Blades affected by a fixed exchange rate? 4. 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? Do you think Blades contributes to these disadvantages to a great extent? How are companies such as Blades affected by a freely floating exchange rate?

5. What do you think will happen to the Thai bahts value when the swap arrangement is completed? How will this affect Blades?

ASSIGNMENT # 3
TOPIC: CASE STUDY OF CHAPTER 4 Exchange Rate Determination Case Problem: Blades, Inc. 1. How are percentage changes in a currencys value measured? Illustrate your answer numerically by assuming a change in the Thai bahts value from a value of $.022 to $.026. 2. What are the basic factors that determine the value of a currency? In equilibrium, what is the relationship between these factors? 3. How might the relatively high levels of inflation and interest rates in Thailand have affected the bahts value? (Assume a constant level of UK inflation and interest rates.) 4. How do you think the loss of confidence in the Thai baht, evidenced by the withdrawal of funds from Thailand, affected the bahts value? Would Blades be affected by the change in value, given the primary Thai customers commitment? 5. Assume that Thailands central bank wishes to prevent a withdrawal of funds from its country in order to prevent further changes in the currencys value. How could it accomplish this objective using interest rates? 6. Construct a spreadsheet illustrating the steps Blades treasurer would need to follow in order to speculate on expected movements in the bahts value over the next 30 days. Also show the speculative profit (in pounds) resulting from each scenario. Use both of Ben Holts examples to illustrate possible speculation. Assume that Blades can borrow either 7 million or the baht equivalent of this amount. Furthermore, assume that the following short-term interest rates (annualized) are available to Blades:

Currency Dollars Thai baht

Lending Rate 8.10% 14.80%

Borrowing Rate 8.20% 15.40%

ASSIGNMENT # 4
TOPIC: CASE STUDY OF CHAPTER 7 International Arbitrage and Interest Rate Parity Case Problem: Blades, Inc.

1. The first arbitrage opportunity relates to locational arbitrage. Holt has obtained spot rate quotations from two banks in Thailand, Minzu Bank and Sobat Bank, both located in Bangkok. The bid and ask prices of Thai baht for each bank are displayed in the table below: Bid Ask Minzu Bank $.0224 $.0227 Sobat Bank $.0228 $.0229

Determine whether the foreign exchange quotations are appropriate. If they are not appropriate, determine the profit you could generate by withdrawing $100,000 from Blades checking account and engaging in arbitrage before the rates are adjusted. 2. Besides the bid and ask quotes for the Thai baht provided in the previous question, Minzu Bank has provided the following quotations for the U.S. dollar and the Japanese yen:

Quoted Bid Price Japanese yen in U.S dollar Thai baht in japanese yen $.0085

Quoted Ask Price $.0086

2.69

2.70

Determine whether the cross exchange rate between the Thai baht and Japanese yen is appropriate. If it is not appropriate, determine the profit you could generate for Blades Inc, by withdrawing $100,000 from Blades checking account and engaging in triangular arbitrage before the rates are adjusted.

3. Ben Holt has obtained several forward contract quotations for the Thai baht to determine whether covered interest arbitrage may be possible. He was quoted a forward rate of $0.0225 per Thai baht for a 90-day forward contract. The current spot rate is $0.0227. Ninety-day interest rates available to Blades in the U.S. are 2 percent, while 90-day interest rates in Thailand are 3.75 percent (these rates are not annualized). Holt is aware that covered interest arbitrage, unlike locational and triangular arbitrage, requires an investment of funds. Thus, he would like to be able to estimate the dollar profit resulting from arbitrage over and above the dollar amount available on a 90-day U.S. deposit. Determine whether the forward rate is priced appropriately. If it is not priced appropriately, determine the profit you could generate for Blades by withdrawing $100,000 from Blades checking account and engaging in covered interest arbitrage. Measure the profit as the excess amount above what you could generate by investing in the U.S. money market. 4. Why are arbitrage opportunities likely to disappear soon after they have been discovered? To illustrate your answer, assume that covered interest arbitrage involving the immediate purchase and forward sale of baht is possible. Discuss how the bahts spot and forward rates would adjust until covered interest arbitrage is no longer possible. What is the resulting equilibrium state called?

ASSIGNMENT # 5
TOPIC: CASE STUDY & SMALL BUSINESS DILEMMA OF CHAPTER 5 Currency Derivatives Case Problem: Blades, Inc. 1. If Blades uses call options to hedge its yen payables, should it use the call option with the exercise price of $0.00756 or the call option with the exercise price of $0.00792? Describe the tradeoff. 2. Should Blades allow its yen position to be unhedged? Describe the tradeoff. 3. Assume there are speculators who attempt to capitalize on their expectation of the yens movement over the two months between the order and delivery dates by either buying or selling yen futures now and buying or selling yen at the future spot rate. Given this information, what is the expectation on the order date of the yen spot rate by the delivery date? (Your answer should consist of one number.) 4. Assume that the firm shares the market consensus of the future yen spot rate. Given this expectation and given that the firm makes a decision (i.e., option, futures contract, remain unhedged) purely on a cost basis, what would be its optimal choice? 5. Will the choice you made as to the optimal hedging strategy in question 4 definitely turn out to be the lowest-cost alternative in terms of actual costs incurred? Why or why not? 6. Now assume that you have determined that the historical standard deviation of the yen is about $0.0005. Based on your assessment, you believe it is highly unlikely that the future spot rate will be more than two standard deviations above the expected spot rate by the delivery date. Also assume that the futures price remains at its current level of $0.006912. Based on this expectation of the future spot rate, what is the optimal hedge for the firm? Small Business Dilemma 1. How can the Sports Exports Company use currency futures contracts to hedge against exchange rate risk? Are there any limitations of using currency futures contracts that would prevent the Sports Exports Company from locking in a specific exchange rate at which it can sell all the pounds it expects to receive in each of the upcoming months? 2. How can the Sports Exports Company use currency options to hedge against exchange rate risk? Are there any limitations of using currency options contracts that would prevent the Sports Exports Company from locking in a specific exchange rate at which it can sell all the pounds it expects to receive in each of the upcoming months? 3. Jim Logan, owner of the Sports Exports Company, is concerned that the pound may depreciate substantially over the next month, but he also believes that the pound could

appreciate substantially if specific situations occur. Should Jim use currency futures or currency options to hedge the exchange rate risk? Is there any disadvantage of selecting this method for hedging?

ASSIGNMENT # 6
TOPIC: CASE STUDY OF CHAPTER 8 Relationships Among Inflation, Interest Rates, and Exchange Rates Case Problem: Blades, Inc. 1. What is the relationship between the exchange rates and relative inflation levels of the two countries? How will this relationship affect Blades Thai revenue and costs given that the baht is freely floating? What is the net effect of this relationship on Blades? 2. What are some of the factors that prevent PPP from occurring in the short run? Would you expect PPP to hold better if countries negotiate trade arrangements under which they commit themselves to the purchase or sale of a fixed number of goods over a specified time period? Why or why not? 3. How do you reconcile the high level of interest rates in Thailand with the expected change of the baht-dollar exchange rate according to PPP? 4. Given Blades future plans in Thailand, should the company be concerned with PPP? Why or why not? 5. PPP may hold better for some countries than for others. Given that the Thai baht has been freely floating for only a short period of time, how do you think Blades can gain insight into whether PPP will hold for Thailand?