Reference no: EM132611025

RSA Manufacturer is a LL.5 based company with the supposition of their total asets of only $200 million Suppose, the company produces a single type of product, roller blades (Speedos). As the chief financial officer of RSA, Steven is pleased that his current system of exporting "Speedos" to Thailand seems to be working well. RSA's primary customer in Thailand, a retailer called Entertainment Products, has committed itself to purchasing a fined number of Speedos annually for the next 3 years at a fixed price denominated in baht, Thailand's curency. Furthermore, ASA is using a Thai supplier for some of the components needed to manufacture Speedos. Nevertheless, Steven is concerned about recent developments in Asia. Foreign investors from various countries had invested heavily in Thailand to take advantage of the high interest rates there. As a result of the weak economy in Thailand, however, many foreign investors have lost confidence in Thailand and have withdrawn their funds. Steven has two major concerns regarding these developments. First, he is wondering how these changes in Thailand's economy could affect the value of the Thai baht and, consequently, ASA. More specifically, he is wondering whether the effects on the Thai baht may affect RSA even though its primary Thai customer is committed to RSA over the next 3 yours. Second, Steven believes that RSA may be able to speculate on the anticipated movement of the baht, but he is uncertain about the procedure needed to accomplish this. To facilitate Steven's understanding of exchange rate speculation, he has asked you, RSA's financial analyst, to provide him with detailed illustrations of two scenarios. In the first, the baht would move from a cument level of $ 022 to 5.020 within the next 30 days. Under the second scenario, the baht would move from its curent level to 5.025 within the next 30 days. Based on Steven's needs, he has provided you with the following list of questions to be answered:

Question 1. How are percentage changes in a currency's value measured? Illustrate your answer numerically by assuming a change in the Thai baht's value from a value of $.022 to $.026.

Question 2. What are the basic factors that determine the value of a currency? In equilibrium, what is the relationship between these factors?

Question 3. How might the relatively high levels of inflation and interest rates in Thailand affect the baht's value? (Assume a constant level of U.S. inflation and interest rates.)

Question 4. How do you think the loss of confidence in the Thai baht, evidenced by the withdrawal of funds from Thailand, will affect the baht's value? Would RSA be affected by the change in value, given the primary Thai customer's commitment?

Question 5. Assume that Thailand's central bank wishes to prevent a withdrawal of funds from its country in order to prevent further changes in the currency's value. How could it accomplish this objective using interest rates?