Currency and Thai Baht Essay Example for Free

specie and siamese connection Baht EssayAssessing Future Ex replace Rate Movements1. How are percentage forms in a notess take to be measured? Illustrate your answer numerically by assuming a deviate in the siamese connection ticals value from a value of $0.022 to $0.026. ANSWER The percentage change in a bullions value is measured as followswhere S denotes the spot rate, and St 1 denotes the spot rate as of the earlier date. A positive percentage change represents appreciation of the everywhereseas bills, while a negative percentage change represents depreciation. In the example provided, the percentage change in the Tai baht would beThat is, the baht would be expected to appreciate by 18.18%. 2. What are the canonical factors that fasten the value of a currency? In equilibrium, what is the relationship between these factors? ANSWER The basic factors that determine the value of a currency are the supply of the currency for sale and the consider for the currency. A blue take of supply of a currency generally decreases the currencys value, while a broad(prenominal) level of demand for a currency increases its value. In equilibrium, the supply of the currency equals the demand for the currency. 3. How susceptibility the relatively advanced levels of fanfare and wager range kick in affected the bahts value? (Assume a constant level of U.S. inflation and interest rates.) ANSWER The baht would be affected twain by inflation levels and interest rates in Thailand relative to levels of these variables in the U.S. A high level of inflation tends to result in currency depreciation, as it would increase the Thai demand for U.S. goods, causing an increase in the Thai demand for dollars.Furthermore, a relatively high level of Thai inflation would reduce the U.S. demand for Thai goods, causing an increase in the supply of baht for sale. Conversely, the high level of interest rates in Thailand may cause appreciation of the baht relative to the dol lar. A relatively high level of interest rates in Thailand would have rendered investments there more attractive for U.S. investors, causing an increase in the demand for baht. Furthermore, U.S. securities would have been less attractive to Thai investors, causing an increase in the supply of dollars for sale. However, investors might be unwilling to invest in baht-denominated securities if they are concerned about the potential depreciation of the baht that could result from Thailands inflation.4. How do you think the loss of confidence in the Thai baht, evidenced by the withdrawal of funds from Thailand, affected the bahts value? Would Blades be affected by the change in value, given the primary Thai customers commitment? ANSWER In general, a depreciation in the foreign currency results when investors liquidate their investments in the foreign currency, increasing the supply of its currency for sale. Blades would probably be affected by the change in value even though its Thai cus tomers commitment, as the sales are denominated in baht. Thus, the depreciation in the baht would have caused a conversion of the baht revenue into fewer U.S. dollars.5. Assume that Thailands central aver wishes to go on a withdrawal of funds from its country in order to prevent further changes in the currencys value. How could it accomplish this objective using interest rates? ANSWER If Thailands central bank wishes to prevent further depreciation in the bahts value, it would attempt to increase the level of interest rates in Thailand. In turn, this would increase the demand for Thai baht by U.S. investors, as Thai securities would now seem more attractive. This would place upward pressure on the currencys value. However, the high interest rates could reduce local borrowing and spending.6. Construct a spreadsheet illustrating the steps Blades treasurer would requisite to follow in order to speculate on expected movements in the bahts value oer the next 30 days. Also show the spe culative profit (in dollars) resulting from each scenario. Use both of Ben Holts examples to illustrate possible speculation. Assume that 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 BladesCurrency Dollars Thai bahtLending Rate 8.10% 14.80% imbibeing Rate 8.20% 15.40%ANSWERDepreciation of the Baht from $0.022 to $0.0201. Borrow Thai baht ($10,000,000/0.022) 2. permute the Thai baht to dollars ($454,545,454.50 million $0.022). 3. Lend the dollars at 8.10% annualized, which represents a 0.68% fleet over the 30-day period computed as 8.10% (30/360). After 30 days, Blades would receive ($10,000,000 (1 + .0068)) 4. Use the proceeds of the dollar lend refund (on Day 30) to recall the baht borrowed. The annual interest on the baht borrowed is 15.40%, or 1.28% over the 30-day period computed as 15.40% (30/360). The totality baht amount necessary to repay the l oan is therefore (454,545,454.50 (1 + .0128)) 454,545,454.50 10,000,000.0010,068,000.00460,363,636.405. add together of dollars necessary to repay baht loan ($THB460,363,636.40 $0.02) 6. Speculative profit ($10,068,000 $9,207,272.73)9,207,272.73 860,727.27Appreciation of the Baht from $0.022 to $0.0251. Borrow dollars. 2. Convert the dollars to Thai baht ($10 million/$0.022). 3. Lend the baht at 14.80% annualized, which represents a 1.23% return over the 30-day period computed as 14.80% (30/360). After 30 days, Blades would receive (THB454,545,454.50 (1 + .0123)) 4. Use the proceeds of the baht loan repayment (on Day 30) to repay the dollars borrowed. The annual interest on the dollars borrowed is 8.20%, or 0.68% over the 30-day period computed as 8.20% (30/360). The total dollar amount necessary to repay the loan is therefore ($10,000,000 (1 + .0068)) 5. Number of baht necessary to repay dollar loan ($10,068,000.00/$0.025) 6. Speculative profit (THB460,136,363.60 THB402,720,0 00.00) 7. Dollar equivalent of speculative profit (THB57,416,363.60 $0.025) 10,000,000.00 454,545,454.50460,136,363.6010,068,000.00 402,720,000.00 57,416,363.60 1,435,409.09