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The Real Problem.

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Introduction

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. ...read more.

Middle

Second, by having a subsidiary in Thailand, we will reduce the economic exposure to the fluctuations of Baht and we could take advantage of the depreciation of the Baht. The company should try to produce as much Speedos as possible to sell in Thailand and in the UK and even possibly in the U.S. to increase the outflows of the Baht. If the currency depreciates (Baht), then the company saves money by exchanging $ for the Baht to pay back the production costs incurred in Thailand. Inflation in Thailand will cause the domestic currency to depreciate against other foreign currencies but if the market is efficient, Purchasing Power Parity should hold, and then the increase in inflation in Thailand will be offset by the appreciation of the $U.S. This means that the inflation in Thailand will not affect the price of exports to the UK and to the U.S. Third, by opening a subsidiary in Thailand, the company could decrease the variable costs incurred in the U.S. for the import of materials from Thailand and the export cost to Thailand of the goods produced in the U.S.. ...read more.

Conclusion

For the following scenario: if there is no change in the Baht, the cost of THB3,000 @ $.0220 will be approximately $66, which is cheaper than the cost of production in the U.S. If the Baht depreciate by 5 percent, the cost of one pair of Speedo of THB3,000 @ $.0209 will be approximately $62.7. If the Baht depreciate by 10 percent, the cost of THB3,000 @ $.0198 will be approximately $59.4. If the company does not open a subsidiary in Thailand and keeps importing some of the supplies, then the company will be negatively affected by the depreciation of the Baht. The company will receive less dollars for the goods sold to the importer in Thai since the dollars will have appreciated and because they have a fixed contract for the price of the Speedos of THB4,594. Therefore, the best solution is to open a subsidiary in Thailand, and finance it by borrowing pounds in the U.K. In this way Blades will not only decrease its economic exposure by having cash outflows in UK pounds and in Baht, but it will also make it easier for the company to gain market share in Thailand and in Asia in general when the economic conditions in the region improve. ...read more.

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