Blades Inc
Abstract Blades, Incorporated has been exporting to Thailand since its decision to supplement its declining U.S. sales. This decision seems ideal due to the Southeast Asia fast growing economies. With this in mind, this paper will analyze the Blades, Inc. case in Chapter 5 of the textbook by discussing the feasibility for Ben Holt, the chief financial officer, to move forward to hedging Blades’ yen payables position, the advantages and disadvantages associated with purchasing derivatives instruments such as call options and future contracts, the use of the market consensus of the future yen spot rate provided to determine the optimal hedge for the firm and the danger and/or value of using derivatives as a risk management tool (Madura, 2009).
B) Section A-Should Ben Holt be advised to move forward to hedge Blades’ yen payables position? Why? It would be a wise decision for Ben Holt to move forward with hedging Blades’ yen payables position, for the simple fact that the volatility of the yen has historically been erratic. The text defines hedging as “a practice where exporting companies contract with a bank that guarantees the exporter a fixed number of U.S. dollars in exchange for payment of the goods it receives in a foreign currency” (Kubasek, Brennan, & Browne, 2009, p. 267). The exporting company pays a fee to the bank; the fee is based on the risk the bank is taking that the foreign currency will fluctuate (Kubasek, Brennan, & Browne, 2009, p. 267). By hedging, Holt will be taking preventative measures to safeguard Blades against trading with uncertainty. There are several options Holt can choose from to hedge Blades’ yen payables. He can choose to purchase a futures contract, purchase two call options contracts, or purchase currency put options. The text states, “If a firm that buys a currency futures contract decides before the settlement date that it no longer wants to maintain its position, it can close out the position by selling
B) Section A-Should Ben Holt be advised to move forward to hedge Blades’ yen payables position? Why? It would be a wise decision for Ben Holt to move forward with hedging Blades’ yen payables position, for the simple fact that the volatility of the yen has historically been erratic. The text defines hedging as “a practice where exporting companies contract with a bank that guarantees the exporter a fixed number of U.S. dollars in exchange for payment of the goods it receives in a foreign currency” (Kubasek, Brennan, & Browne, 2009, p. 267). The exporting company pays a fee to the bank; the fee is based on the risk the bank is taking that the foreign currency will fluctuate (Kubasek, Brennan, & Browne, 2009, p. 267). By hedging, Holt will be taking preventative measures to safeguard Blades against trading with uncertainty. There are several options Holt can choose from to hedge Blades’ yen payables. He can choose to purchase a futures contract, purchase two call options contracts, or purchase currency put options. The text states, “If a firm that buys a currency futures contract decides before the settlement date that it no longer wants to maintain its position, it can close out the position by selling
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