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Blades CH9

Blades, Inc. must make hedging, borrowing, and investment decisions considering the fluctuating Thai baht exchange rate. Market-based forecasts using current spot and forward rates suggest the baht will depreciate 6% over the next quarter. However, no single forecasting technique will always be perfect due to unknown political and economic variables that impact exchange rates.

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297 views

Blades CH9

Blades, Inc. must make hedging, borrowing, and investment decisions considering the fluctuating Thai baht exchange rate. Market-based forecasts using current spot and forward rates suggest the baht will depreciate 6% over the next quarter. However, no single forecasting technique will always be perfect due to unknown political and economic variables that impact exchange rates.

Uploaded by

lynette_garner_1
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Blades, Inc.

1. To hedge or not to hedge. One major consideration/benefit of forecasting for Blades


would be the ability to forecast exchange rates to give information to Blades regarding
(1) Hedging decisions. Blades must face the decision of whether to hedge future
payables and receivables in the Thai baht currencies. (2) Short-term decision need to be
made to indicate to Blades when is the right time to borrow, especially when they have
access to different currencies. The currency they will use to borrow will ideally exhibit a
lower interest rate and weaken in value over the financing period.(3) Capital budgeting
decisions must be made on whether Blades will continue to invest in foreign projects,
which require the exchange of currencies. With the depreciating baht, an unpredictable
and declining economy, and the grim outlook by some forecasters, it is definitely time
for Blades to consider several forecasting options.

2. Market based forecasting is easiest to use. A fundamental forecast may have greater
details and steps involved to arrive at a reasonable forecast, but isn’t necessarily more
accurate.

3. A forward rate quoted for a specific date in the future is commonly used as the
forecasted spot rate on that future date. The forward rate serves a market-based
forecast since it reflects the market’s expectation of the spot rate at the end of the
forward horizon (90 days), therefore is should reflect more accuracy. It also reflects a
discount which represents a higher nominal interest rate and the higher expected
inflation that goes along with that. This would cause downward pressure on the baht.

4. Current spot rate of the baht = $.023 Current 90-day forward rate = $.021
Given that forward rate is measured as F=S(1 + p) where p represents the forward
premium. Since p represents the percentage by which the forward rate exceeds the
spot rate, it serves as the expected percentage change in the exchange rate:

$.021= + $.023(1 + P) = $.023(1 - .06) (using -6 due to 6% depreciation expected)


.$023(.94) = F = $021 WHICH IS THE FORWARD RATE

5. Technical data uses historical data to successfully forecast the future value of a
currency. Blades now has enough information to make better financial decisions when
deciding what to do with their funds. The Technical forecast method may not always be
the best for forecasting in the future if we are looking down the road further, however.
We are talking short-term forecasts accuracy at best. Technical forecast rarely provide
point estimates or a range of possible future values, and because of this, technical
analysis typically cannot estimate future exchange rates in precise terms, such as in the
case of the baht in this study. A more accurate forecast using historical information
than when using the spot rate as a forecast would indicate that the foreign exchange
rate market for the Thai baht is inefficient and today’s exchange rate does not reflect all
historical information.

6. A weighted average should be used as follows:

(.30)(-2%) + (.15)(-5%) + (.55)(-10%) = 6.85%

This shows that the baht is expected to depreciate by 6.85% over the next quarter.

7. Do you think the technique you have identified in question 6 will always be the most
accurate? Why or Why not?

No, there isn’t always one forecast that is perfect in all scenarios. There are always
variables to take into place (government controls, political unrest, job loss, etc) that
cannot be factored in. Many times there are too many unknowns to make an accurate
prediction in every situation. When there are unfavorable economic conditions, there
will be uncertainty surrounding the exchange rate of the baht. There is also high
volatility in the market right now with could alter the forecast.

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