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Assessing Future Exchange Rate Movements

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Beibei Yu

on 5 February 2014

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Transcript of Assessing Future Exchange Rate Movements

Assessing Future Exchange Rate Movements
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 $0.022 to $0.026.
2.What are the basic factors
that determine the value of a currency?
In equilibrium, what is the relationship between these factors?
Supply of the currency for sale
Demand for the currency

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

4.How do you think the loss of
confidence in the Thai baht, evidence by the
withdrawal of funds from Thailand, affected the
baht's value? Would Blades be affected by the change in value, given the primary Thai customer's commitment?
Yes, Blades would be affected by the change in value.
Depreciation in the baht
Li Dan
Ren Peipei
Wang Yunquan
Yu Beibei

% Δ is positive → appreciation
% Δ is negative → depreciation

Inflation rates
Interest rate
Demand and Supply
Exchange Rate Equilibrium
5.Assme 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
Increase the interest rates in Thailand
Place low tax on interest income earned from foreign investment
Provide favorable interest rates for Thailand's "target customers"(country or large corporation)
Form alliance with other country to regulate interest rate strategy in order to attract more capital inflow
fewer $
A depreciation in the Thai baht
6.Construct a spreadsheet illustrating the steps Blades’ treasurer would need to follow in order to speculate on expected movements in the baht’s value over the next 30 days. Also show the speculative profit (in dollars) resulting from each scenario. Use both of Ben Holt’s examples to illustrate possible speculation.
Blades, Inc. Case Study
Assume the 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 Blades:

Thank you!
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