Instructor: Eda Orhun, Ph.D.
ID # :
Due : 03.05.2015 (BLACKBOARD SUBMISSION before midnight)
ORANGE INC CASE STUDY
Orange Inc., a U.S. manufacturer of roller blades, has chosen Thailand as its primary export target for “Speedos,” Orange’s primary product. Moreover, Orange’s primary customer in Thailand, Entertainment Products, has committed itself to purchase 180,000 Speedos annually for the next 3 years at a fixed price denominated in baht, Thailand’s currency. Because of quality and cost considerations, Orange also imports some of the rubber and plastic components needed to manufacture Speedos from Thailand.
Lately, Thailand has experienced weak economic growth and political uncertainty. As investors lost confidence in the Thai baht as a result of the political uncertainty, they withdrew their funds from the country. This resulted in an excess supply of baht for sale over the demand for baht in the foreign exchange market, which put downward pressure on the baht’s value. As foreign investors continued to withdraw their funds from Thailand, the baht’s value continued to deteriorate. Since Orange has net cash flows in baht resulting from its exports to Thailand, a deterioration in the baht’s value will affect the company negatively.
Dan Kant, Orange’s CFO, would like to ensure that the spot and forward rates Orange’s bank has quoted are reasonable. If the exchange rate quotes are reasonable, then arbitrage will not be possible. If the quotations are not appropriate, however, arbitrage may be possible. Under these conditions, Kant would like Orange to use some form of arbitrage to take advantage of possible mispricing in the foreign exchange market. Although Orange is not an arbitrageur, Kant believes that arbitrage opportunities could offset the negative impact resulting from the baht’s depreciation, which would otherwise seriously affect Orange’s profit margins.
Kant has identified three arbitrage