Mini case: Blades Inc.
- If Blades uses call options to hedge its yen payables, should it use the call option with the exercise price of $0.00756 or the call option with the exercise price of $0.00792? Describe the tradeoff.
- Should Blades allow its yen position to be unhedged? Describe the tradeoff.
- If Blades does not enter into the agreement with the British firm and continues to export to Thailand and import from Thailand and Japan, do you think the increased correlations between the Japanese yen and the Thai baht will increase or decrease Blades’ transaction exposure?
- Do you think Blades should import components from Japan to reduce its net transaction exposure in the long run? Why or why not?
- Did the intervention effort by the Thai government constitute direct or indirect intervention? Explain.
- Did the intervention by the Thai government constitute sterilized or non sterilized intervention? What is the difference between the two types of intervention? Which type do you think would be more effective in increasing the value of the baht? Why? (Hint: Think about the effect of nonsterilized intervention on U.S. interest rates.)
1. What is the relationship between the exchange rates and relative inflation levels of the two countries? How will this relationship affect Blades’ Thai revenue and costs given that the baht is freely floating? What is the net effect of this relationship on Blades?
1. What type(s) of exposure (i.e., transaction, economic, or translation exposure) is Blades subject to? Why?
The Mini Case 2
Blades, Inc. needs to order supplies 2 months ahead of the delivery date. It is considering an order from a Japanese supplier that requires a payment of 12.5 million yen payable as of the delivery date. Blades have two choices:
• Purchase two call options contracts (since each option contract represents 6,250,000 yen).
• Purchase one futures contract (which represents 12.5 million yen).
The futures price on yen has historically exhibited a slight discount from the existing spot rate. However, the firm would like to use currency options to hedge payables in Japanese yen for transactions 2 months in advance. Blades would prefer hedging its yen payable position because it is uncomfortable leaving the position open given the historical volatility of the yen. Nevertheless, the firm would be willing to remain unhedged if the yen becomes more stable someday.
The table below summarizes the option and futures information available toBlades: