the exchange rates over numerous quarters. He then the forward rate will yield a better market-based used this analysis to forecast the baht's value next quar- forecast? Why? ter. The technical forecast indicates a depreciation of 4. The current 90-day forward rate for the baht is the baht by 6 percent over the next quarter from the $.021. By what percentage is the baht expected to baht's current level of $.023 to $.02162. He has also change over the next quarter according to a market- conducted a fundamental forecast of the baht-dollar based forecast using the forward rate? What will be exchange rate using historical inflation and interest the value of the baht in 90 days according to this rate data. The fundamental forecast, however, depends forecast? on what happens to Thai interest rates during the next 5. Assume that the technical forecast has been more quarter and therefore reflects a probability distribution. Based on the inflation and interest rates, there is a 30 accurate than the market-based forecast in recent percent chance that the baht will depreciate by 2 per- weeks. What does this indicate about market efficiency cent, a 15 percent chance that the baht will depreciate for the baht-dollar exchange rate? Do you think this by 5 percent, and a 55 percent chance that the baht will means that technical analysis will always be superior depreciate by 10 percent to other forecasting techniques in the future? Why or Holt has asked you to answer the following questions: why not? 6. What is the expected value of the percentage change 1. Considering both Blades' current practices and in the value of the baht during the next quarter based future plans, how can it benefit from forecasting the baht-dollar exchange rate? on the fundamental forecast? What is the forecasted value of the baht using the expected value as the forecast? If 2. Which forecasting technique (i.e., technical, the value of the baht 90 days from now turns out to be fundamental, or market-based) would be easiest $.022, which forecasting technique is the most accurate? to use in forecasting the future value of the baht? (Use the absolute forecast error as a percentage Why? of the realized value to answer the last part of this 3. Blades is considering using either current spot question.) rates or available forward rates to forecast the future 7. Do you think the technique you have identified in value of the baht. Available forward rates currently question 6 will always be the most accurate? Why or exhibit a large discount. Do you think the spot or why not? BLADES, INC. CASE Forecasting Exchange Rates Recall that Blades, Inc., the U.S.-based manufacturer of in the value of the baht have been highly volatile, and roller blades, is currently both exporting to and import- foreign investors in Thailand have lost confidence in ing from Thailand. Ben Holt, Blades' chief financial the baht, causing massive capital outflows from Thai- officer (CFO), and you, a financial analyst at Blades, land. Consequently, the baht has been depreciating. Inc. are reasonably happy with Blades' current perfor- When Thailand was experiencing a high economic mance in Thailand. Entertainment Products, Inc., a growth rate, few analysts anticipated an economic Thai retailer for sporting goods, has committed itself downturn. Consequently, Holt never found it neces- to purchase a minimum number of Blades' Speedos sary to forecast economic conditions in Thailand annually. The agreement will terminate after 3 years. even though Blades was doing business there. Now, Blades also imports certain components needed to however, his attitude has changed. A continuation of manufacture its products from Thailand. Both Blades the unfavorable economic conditions prevailing in imports and exports are denominated in Thai baht. Thailand could affect the demand for Blades' pro- Because of these arrangements, Blades generates ducts in that country. Consequently, Entertainment approximately 10 percent of its revenue and 4 percent Products may not renew its commitment for another of its cost of goods sold in Thailand. 3 years. Currently, Blades' only business in Thailand consists Since Blades generates net cash inflows denomi- of this export and import trade. Holt, however, is think- nated in baht, a continued depreciation of the baht ing about using Thailand to augment Blades' U.S. could adversely affect Blades, as these net inflows business in other ways as well in the future. For example, would be converted into fewer dollars. Thus, Blades is Holt is contemplating establishing a subsidiary in Thai- also considering hedging its baht-denominated inflows. land to increase the percentage of Blades' sales to that Because of these concerns, Holt has decided to reas- country. Furthermore, by establishing a subsidiary in sess the importance of forecasting the baht-dollar Thailand, Blades will have access to Thailand's money exchange rate. His primary objective is to forecast the and capital markets. For instance, Blades could instruct baht-dollar exchange rate for the next quarter. A sec- its Thai subsidiary to invest excess funds or to satisfy its ondary objective is to determine which forecasting short-term needs for funds in the Thai money market. technique is the most accurate and should be used in Furthermore, part of the subsidiary's financing could be future periods. To accomplish this, he has asked you, as obtained by utilizing investment banks in Thailand. the financial analyst at Blades, for help in forecasting Due to Blades' current arrangements and future the baht-dollar exchange rate for the next quarter. plans, Holt is concerned about recent developments Holt is aware of the forecasting techniques available. in Thailand and their potential impact on the com- He has collected some economic data and conducted a pany's future in that country. Economic conditions in preliminary analysis for you to use in your analysis. For Thailand have been unfavorable recently. Movements example, he has conducted a time-series analysis for
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