Option and Blades

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MiniCase 2
Blades, Inc.

Chap 5

1. 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.

2. Should Blades allow its yen position to be unhedged? Describe the tradeoff.

Chap 6

1. Did the intervention effort by the Thai government constitute direct or indirect intervention? Explain.

2. Did the intervention by the Thai government constitute sterilized or nonsterilized 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.)

Chap 8

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?

Chap 10

1. What type(s) of exposure (i.e., transaction, economic, or translation exposure) is Blades subject to? Why?

2. 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?

3. Do you think Blades should import components from Japan to reduce its net transaction exposure in the long run? Why or why not?
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