Blades Inc. exports swimsuits to the UK and Thailand and imports materials from Thailand. It is assessing hedging strategies to manage foreign exchange risk. For the UK exports, a money market hedge provides the highest dollar value of pounds received. For Thai baht exports, money market hedging is also best to maximize baht inflows in dollars. It is easier for Blades to hedge foreign currency inflows than outflows due to uncertainty in payment amounts. Blades could modify import timing or payment terms to reduce transaction exposure, but this increases inventory costs or requires more frequent hedging.

1. Chapter 11: Management of
Transaction Exposure
Case Study: Blades, Inc.
Team Members :
Timmy 0521812
Jimmy 0521807
Sheby 0521827
2017/04/17
International Financial Management

2. Agenda
• Case Study overview
• Problem solutions
• Q&A

3. Blades, Inc.
• Blades’ product : Speedos
• Decides to expand its international trade
relationship by exporting to UK Jogs, Ltd.
• Continues to export to Thailand and
import materials from Thailand

4. Inflows
• Annual 200,000 pairs of Speedos, Blades’
product, for a price of ￡80 per pair.
• The agreement is to last for 2 years then it may
be renewed by Blades and Jogs.
• Thailand customer, Entertainment Products, is
committed to the purchase of 180,000 pairs of
Speedos annually for another three years at a
fixed price of 4,594 Thai baht per pair, it may be
renewed.
• Payment for these sales is made on the first of
each quarter (Jan, Apr, July, October).

5. Outflow
• Imports materials to manufacture 72,000
pairs of Speedos annually from Thailand.
• Cost 3,000 baht per pair of Speedos
• Payment terms within 60 days of delivery,
the delivery day is first day of each
quarter but Blades decided to pay earlier
because it thinks that the earlier payment
will be beneficial

6. Given Information
Thailand UK US
Current
Spot Rate
0.023 1.5
90 days
forward
rate
0.0215 1.49
Put option
Premium
N/A 0.02
Put Option
Exercise
Price
N/A 1.47
Call Option
Premium
N/A 0.015
CallOption
Exercise
Price
N/A 1.48
90-day
borrowing
rate
4% 2% 2.30%
90-day
lending
rate
3.50% 1.80% 2.10%
Probability
British Pound Spot
Rate in 90 days
Thai Baht Spot
Rate in 90 days
5% 1.45 0.02
20% 1.47 0.0213
30% 1.48 0.0217
25% 1.49 0.022
15% 1.5 0.023
5% 1.52 0.0235
No options are available for
Thailand, but British call and
put options are available for
￡31,250 per option.

7. Consolidated net cash flow
assessment of Blades, Inc.
Currency Unit Price
Quantity
(pairs)
Total Inflow Total Outflow
Net Inflow/
Outflow
British
Pound
£ 80.00 50,000 £ 4,000,000.00 £ 4,000,000.00
Thai Baht THB 4,594.00 45,000
THB
206,730,000.00
THB
152,730,000.00
Thai Baht THB 3,000.00 18,000
THB
54,000,000.00
• Payment for sales is made quarterly

8. Q1. Compare hedging alternatives of Thai baht vs.
unhedged. Do you think Blades should hedge or remain
unhedged? If should, which hedge is the most
appropriate?
Money market hedge is better for Blades because it gives
highest dollar value for baht inflow.
Unhedged = $3,344,023.35

9. Q2. Compare hedging alternatives of British Pound vs.
unhedged. Do you think Blades should hedge or remain
unhedged? If should, which hedge is the most
appropriate?
Money market hedge is better for Blades
because it give highest dollar value for British Pounds
inflow

10. Put option = $5,860,000.00
Unhedged = $5,936,000.00
Probability
Spot rate in 90 days $ Dollar Payment =
4,000,000 pounds x spot
rate
5% 1.45 5,800,000.00
20% 1.47 5,880,000.00
30% 1.48 5,920,000.00
25% 1.49 5,960,000.00
15% 1.5 6,000,000.00
5% 1.52 6,080,000.00
Probability
British Pound Spot
Rate in 90 days
Put
Option
Premium
Put Option
Exercise Price
Put Option
Actual
Exercise
Y/N to
exercise
USD to receive
5% 1.45 0.02 1.47 1.45 Y $5,800,000.00
20% 1.47 0.02 1.47 1.45 Y $5,800,000.00
30% 1.48 0.02 1.47 1.46 N $5,840,000.00
25% 1.49 0.02 1.47 1.47 N $5,880,000.00
15% 1.5 0.02 1.47 1.48 N $5,920,000.00
5% 1.52 0.02 1.47 1.5 N $6,000,000.00

11. Q.3: Is it easier for Blades to hedge its inflows or its
outflows denominated in foreign currencies? Why ?
Blades is easier to hedge its inflows in foreign currency
than its outflows because inflows are only affected by the
future exchange rate; while outflows are affected by
future exchange rate and the amount of payables.

12. Q.4: Would any of the hedges for the British Pounds
require Blades to overhedge?
Given Blades' exporting arrangements, do you think it is
subject to over hedging with a money market hedge?
None of the hedges would require Blades, Inc. to overhedge
according to the calculation.
For money market hedge, it is not subject to overhedge.
British retailers have entered into arrangements with
Blades under which prices are fixed. Consequently, it is
unlikely that the actual amount received in the future
will differ from the expected amount.

13. Q.5: Could Blades modify the timing of the Thai
imports in order to reduce the transaction exposure?
What is the trade-off?
Yes, Blades could import more of the sufficient material
for next quarter to reduce the transaction exposure to
Thai baht.
However, by practicing so there will be other costs
should be considered such as higher inventory cost.

14. Q.6: Could Blades modify its payment practices for
the Thai imports in order to reduce its transaction
exposure? What is the trade-off?
Blades could modify its payment practice to reduce
transaction exposure.
However, once modified, Thai baht revenue and cost
would have different payment time and could not cover
each other. Blades would need to practice hedge
techniques more often.