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Blades Inc.

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Solution to Continuing Case Problem: Blades, Inc.
1. What type(s) of exposure (i.e., transaction, economic, or translation exposure) is Blades subject
to? Why?
ANSWER: 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 firm’s present value of future cash flows can be influenced by exchange rate fluctuations.
Translation exposure is the exposure of an MNC’s consolidated financial statements to exchange
rate fluctuations.
2. Using a spreadsheet, conduct a consolidated net cash flow assessment of Blades, Inc., and
estimate the range of net inflows and outflows for Blades for the coming year. Assume that
Blades enters into the agreement with Jogs, Ltd.
ANSWER:
3. If Blades does not enter into the agreement with the British firm and continues to export to
Thailand and import from Thailand and Japan, do you think the increased correlations between the
Japanese yen and the Thai baht will increase or decrease Blades’ transaction exposure?
ANSWER: 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. For
example, if the Thai baht depreciates, resulting in reduced dollar revenue, the Japanese yen will
also depreciate, resulting in reduced dollar costs.
4. Do you think Blades should import components from Japan to reduce its net transaction
exposure in the long run? Why or why not?
ANSWER: 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 level. 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.
5. Assuming Blades enters into the agreement with Jogs, Ltd., how will its overall transaction
exposure be affected?
ANSWER: 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. For example, a depreciation in the British pound would likely be
accompanied by an appreciation in the Thai baht and the Japanese yen. The depreciation of the
pound would result in reduced dollar revenue from Blades’ British exports. 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.
6. Given that Thai roller blade manufacturers located in Thailand have begun targeting the U.S.
roller blade market, how do you think Blades’ U.S. sales were affected by the depreciation of the
Thai baht? How do you think its exports to Thailand and its imports from Thailand and Japan were
affected by the depreciation?
ANSWER: 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’ exports to Thailand were affected negatively by the depreciation, as
the baht it received were converted into fewer dollars. 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.
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