The Real Problem.

Authors Avatar

The Real Problem

The real problem is that Blade Inc. has all of its positive cash inflows coming from foreign countries in foreign currencies. The company has economic exposure of £16,000,000 coming from the UK and THB586,920,000 coming from Thailand. The company is also affected by economic and market conditions, especially in Thailand, such as consumer spending on leisure goods, which has declined considerably, high level of inflation, depreciation of the Baht and lastly, the current Thai retailer may not renew the contract with Blade after two years. All of these economic and market conditions can affect sales in Thailand and the $ amount remitted to the Parent U.S. company.

Table of cash flows and currency exposure

In the current operations of the company, Blades, Inc. has a high economic exposure as its cash inflows depend highly on the fluctuations in exchange rates between the $ and the Baht, and the $ and L. The company will be negatively affected by the depreciation of the Baht, which is likely to occur in the future, because of unfavorable economic conditions in Thailand, such as high inflation. Since the materials for only 80,000 pairs of Speedos are purchased in Thailand while 180,000 pairs are exported to Thailand, that means that there are 100,000 pairs that are produced with US materials, and their price will increase in terms of Baht as the Baht depreciates. This will make the 100,000 Speedos more expensive for the company to sell in Thailand. The company’s margin will have to be reduce because the contract with the Thai retailer is at a fixed of THB4,594 per pair. Because the cash inflows are greater than the cash outflows in Thailand and because Blades, Inc. has a contract for another 2 years, continuing with the current system of operation will cause the company’s revenues to decrease in terms of US dollars if the Baht depreciates. In addition to the economic exposure in Thailand, Blades, Inc. also has high economic exposure in terms of UK Pounds. The company’s greatest part of foreign cash inflows comes from the UK and it has no cash outflows in pounds, so exchange rate fluctuations can affect the company’s cash inflows from the U.K.  If the pound depreciates with respect to the dollar, the cash flows of the company will be reduced

Join now!

        The Solution

Our solution to reduce the economic exposure of the company is the following: Blades, Inc. should borrow pounds in the U.K. in order to reduce its economic exposure in the U.K. and it should use these pounds to finance a new subsidiary in Thailand.

First, by borrowing pounds in the U.K., the company will reduce its economic exposure of pounds since the company will now have cash outflows in the U.K. The company will use the pounds received from the sales of Speedos in the U.K. to pay back the loan, reducing the final inflows of ...

This is a preview of the whole essay