Currency and Thai Baht Essay Example for Free

Currency and Tai Baht EssayAssessing Future Exchange count Movements1. How are percentage changes in a coins value measured? Illustrate your answer numerically by assuming a change in the Siamese ticals value from a value of $0.022 to $0.026. ANSWER The percentage change in a currencys value is measured as bindswhere S denotes the full stop rate, and St 1 denotes the spot rate as of the earlier date. A positive percentage change represents appreciation of the foreign currency, while a negative percentage change represents depreciation. In the example provided, the percentage change in the Thai tical would beThat is, the baht would be expected to appreciate by 18.18%. 2. What are the basic factors that coiffe the value of a currency? In equilibrium, what is the relationship between these factors? ANSWER The basic factors that determine the value of a currency are the supply of the currency for sale and the read for the currency. A high level of supply of a currency genera lly decreases the currencys value, while a high level of demand for a currency increases its value. In equilibrium, the supply of the currency equals the demand for the currency. 3. How might the sexual relationly high levels of lump and wager place have affect the bahts value? (Assume a constant level of U.S. inflation and interest judge.) ANSWER The baht would be affected both by inflation levels and interest rates in Thailand relative to levels of these variables in the U.S. A high level of inflation tends to result in currency depreciation, as it would increase the Thai demand for U.S. goods, causing an increase in the Thai demand for dollars.Furthermore, a relatively high level of Thai inflation would reduce the U.S. demand for Thai goods, causing an increase in the supply of baht for sale. Conversely, the high level of interest rates in Thailand may cause appreciation of the baht relative to the dollar. A relatively high level of interest rates in Thailand would have rend ered investments there more attractive for U.S. investors, causing an increase in the demand for baht. Furthermore, U.S. securities would have been less attractive to Thai investors, causing an increase in the supply of dollars for sale. However, investors might be unwilling to invest in baht-denominated securities if they are touch on about the potential depreciation of the baht that could result from Thailands inflation.4. How do you think the loss of confidence in the Thai baht, evidenced by the coitus interruptus of funds from Thailand, affected the bahts value? Would Blades be affected by the change in value, given the primary Thai customers commitment? ANSWER In general, a depreciation in the foreign currency results when investors liquidate their investments in the foreign currency, increasing the supply of its currency for sale. Blades would believably be affected by the change in value even though its Thai customers commitment, as the sales are denominated in baht. Thus, the depreciation in the baht would have caused a conversion of the baht revenue into fewer U.S. dollars.5. Assume that Thailands central bank wishes to prevent a withdrawal of funds from its country in order to prevent further changes in the currencys value. How could it accomplish this objective using interest rates? ANSWER If Thailands central bank wishes to prevent further depreciation in the bahts value, it would attempt to increase the level of interest rates in Thailand. In turn, this would increase the demand for Thai baht by U.S. investors, as Thai securities would now seem more attractive. This would place upward nip on the currencys value. However, the high interest rates could reduce local borrowing and spending.6. Construct a spreadsheet illustrating the steps Blades treasurer would need to follow in order to speculate on expected movements in the bahts value everyplace the next 30 days. Also show the questioning profit (in dollars) resulting from each scenario. Use both of Ben Holts examples to illustrate possible speculation. Assume that Blades can borrow either $10 million or the baht equivalent of this amount. Furthermore, assume that the following short-term interest rates (annualized) are available to BladesCurrency Dollars Thai bahtLending Rate 8.10% 14.80%Borrowing Rate 8.20% 15.40%ANSWERDepreciation of the Baht from $0.022 to $0.0201. Borrow Thai baht ($10,000,000/0.022) 2. Convert the Thai baht to dollars ($454,545,454.50 million $0.022). 3. Lend the dollars at 8.10% annualized, which represents a 0.68% return over the 30-day period computed as 8.10% (30/360). After 30 days, Blades would receive ($10,000,000 (1 + .0068)) 4. Use the proceeds of the dollar loan repayment (on daylight 30) to repay the baht borrowed. The annual interest on the baht borrowed is 15.40%, or 1.28% over the 30-day period computed as 15.40% (30/360). The total baht amount indispensable to repay the loan is then (454,545,454.50 (1 + .0128)) 454,545,454.50 1 0,000,000.0010,068,000.00460,363,636.405. Number of dollars necessary to repay baht loan ($THB460,363,636.40 $0.02) 6. Speculative profit ($10,068,000 $9,207,272.73)9,207,272.73 860,727.27Appreciation of the Baht from $0.022 to $0.0251. Borrow dollars. 2. Convert the dollars to Thai baht ($10 million/$0.022). 3. Lend the baht at 14.80% annualized, which represents a 1.23% return over the 30-day period computed as 14.80% (30/360). After 30 days, Blades would receive (THB454,545,454.50 (1 + .0123)) 4. Use the proceeds of the baht loan repayment (on Day 30) to repay the dollars borrowed. The annual interest on the dollars borrowed is 8.20%, or 0.68% over the 30-day period computed as 8.20% (30/360). The total dollar amount necessary to repay the loan is therefore ($10,000,000 (1 + .0068)) 5. Number of baht necessary to repay dollar loan ($10,068,000.00/$0.025) 6. Speculative profit (THB460,136,363.60 THB402,720,000.00) 7. Dollar equivalent of speculative profit (THB57,416,363.60 $ 0.025) 10,000,000.00 454,545,454.50460,136,363.6010,068,000.00 402,720,000.00 57,416,363.60 1,435,409.09