Blades Inc. Case Assignment
Answers
1) Blades Inc. should hedge their Baht funds using a money market hedging instrument. The money market hedge will have the highest net cash inflow at $3,448,614; whereas the forward hedge will have a net cash inflow of $3,283,695. If left un-hedged, then Blades would only have a 20% probability of having a cash inflow higher than the money market instrument.
Net Baht Paid (A/P)
Pairs Manufactured 18,000 x Estimated cost per pair 3,000
Total 54,000,000
Net Baht Received (A/R)
Pairs Sold 45,000 x Revenue per Pair 4,594
Total 206,730,000
Net Inflow 152,730,000
Forward Hedge for Thai Baht Total Dollar Amount in 90 Days
Forward Rate …show more content…
I do not think that Blades is subject to over hedging a money market as they are entered into a fixed price contract with their exporting arrangements.
5) Blades could import enough materials to offset one period and have their Thai customer make payments directly to the Thai supplier. The consequence of modifying the timing would be an increased inventory load and higher prices for the upcoming periods.
6) Yes – Blades currently pays at the beginning of the 60-day period. If the Thai Baht depreciates over the 60-day period, Blades could have a lower dollar cost. However, if it were to appreciate over the 60-day period, then Blades would pay a higher dollar cost. Furthermore, if Blades choose to delay payment, they could potentially jeopardize the trust between their relationship with the supplier, which could result in increased costs further down the road.
7) Blades could stand to benefit from a long-term hedging technique since they: 1) know exactly how much exposure they have due to contract agreements, and 2) they know the timing of foreign currency inflows. Therefore, since these two variables are known, it would be advantageous for Blades to engage in long-term hedging
Answers
1) Blades Inc. should hedge their Baht funds using a money market hedging instrument. The money market hedge will have the highest net cash inflow at $3,448,614; whereas the forward hedge will have a net cash inflow of $3,283,695. If left un-hedged, then Blades would only have a 20% probability of having a cash inflow higher than the money market instrument.
Net Baht Paid (A/P)
Pairs Manufactured 18,000 x Estimated cost per pair 3,000
Total 54,000,000
Net Baht Received (A/R)
Pairs Sold 45,000 x Revenue per Pair 4,594
Total 206,730,000
Net Inflow 152,730,000
Forward Hedge for Thai Baht Total Dollar Amount in 90 Days
Forward Rate …show more content…
I do not think that Blades is subject to over hedging a money market as they are entered into a fixed price contract with their exporting arrangements.
5) Blades could import enough materials to offset one period and have their Thai customer make payments directly to the Thai supplier. The consequence of modifying the timing would be an increased inventory load and higher prices for the upcoming periods.
6) Yes – Blades currently pays at the beginning of the 60-day period. If the Thai Baht depreciates over the 60-day period, Blades could have a lower dollar cost. However, if it were to appreciate over the 60-day period, then Blades would pay a higher dollar cost. Furthermore, if Blades choose to delay payment, they could potentially jeopardize the trust between their relationship with the supplier, which could result in increased costs further down the road.
7) Blades could stand to benefit from a long-term hedging technique since they: 1) know exactly how much exposure they have due to contract agreements, and 2) they know the timing of foreign currency inflows. Therefore, since these two variables are known, it would be advantageous for Blades to engage in long-term hedging