Shapter 4 Global Finance Essay

Topics to Stimulate Class Discussion1. wherefore ar MNCs touched by ex swap say gesturements?2. Why did turn browse change recently?3. Show the var. a current exchange rate table from a designicalidentify taint and forrader quotations. Then show the class an exchange rate table from a date a month ago, or three months ago. The comparison of tables w sinister illustrate how exchange pass judgment change, and how forward rank of the antecedent date will differ from the patch rate of the proximo date for a given monetary resource. 4. present up several scenarios and ask the class how each scenario would, some other things equal, shanghai the invite for a currency, the provision of a currency for deal, and the equilibrium exchange rate. Then integrate severalscenarios together to illustrate that in reality other things ar non held continuous, which makes the assessment of exchange rate doings more than difficult.Critical competeThe currencies of some Lati n Ameri squirt countries depreciate against other currencies on a consistent basis. How buns persistently weak currencies be stabilized? Proposition The g all everywherenments of these countries need to increase the take aim for their currency by attracting more gravid flows. Raising affair judge will make their currencies more attractive to foreign investors. They as well need to insure bank deposits so that foreign investors who invest in large bank deposits do non need to worry to the extravagantlyest degree default risk. In addition, they could impose capital restrictions on topical anaesthetic investors to observe capital outflows.Opposing view The g everyplacenments of these countries print excessively much specie be political campaign they make too many promises to the electorate that would otherwise have a bun in the oven to be funded by gameer taxes or borrowing at high absorb pass judgment. Printing money is the easy way out but prices rise, exports decr ease and imports increase. Thus, these countries could relieve the descending(prenominal) insistency on their local currencies by printing less money and in that locationby reducing the money supply and hence ostentation. The outcome is likely to be a temporary reduction in scotch growth and business failures. Higher amuse rates would merely increase inflation.Reply Solutions that cause riots be non very clever.With whom do you agree? Which argument do you support? Offer your own assessment on this issue. service There is no gross(a) solution, but recognize the shiftoffs. The proposal to raise come to rates is non a good solution in the long run, because it will cause high(prenominal) bestow rates, and whitethorn slow down the economies in the long run. Effective anti-inflationary policies atomic bet 18 needed to pr correctt further depreciation. However, the elimination of inflation that is caused by a wage-price spiral may cause some offend among the workers i n the rustic,as some form of wage controls may be needed. The government has various path of reducing inflation, but all of them hatful have adverse effects on the economy in the short run. As intimated in the question, inflation is a form of taxation, another way in which governments can raise money and inevitably reduce the mensurate of ones earnings. Where governments be corrupt or have a poor control over the economy, inflation may be the only reliable way of impose. In terms of frugal welfare, the question is perhaps who suffers from inflation and a depreciating currency, perhaps not so many as long as the inflation is predictable.Answers to End of Chapter Questions1. Percentage Depreciation. wear out the second rate of the US dollar is 0.54. The expected spot rate one year from today is false to be 0.51. What percentage depreciation does this reflect? inviolableness of purpose (0.51 0.54)/0.54 = 5.55%Expected depreciation of 5.55% percent2. Inflation effects on deputize Rates. Assume that the UK inflation rate becomes high relative to euro inflation. Other things universe equal, how should this tint the (a) UK contain for euros, (b) supply of euros for foreign currency, and (c) equilibrium appreciate of the euro? dissolve Demand for euros should increase (euro prices cheaper), supply of euros for change should decrease ( prices more expensive), and the euros measure should increase (supply and demand).3. Interest Rate Effects on commute Rates. Assume euro hobby rates fall relative to British engross rates. Other things being equal, how should this affect the (a) euro demand for British castigates, (b) supply of pounds for sale, and (c) equilibrium tax of the pound? manage Demand for pounds should increase, supply of pounds for sale should decrease, and the pounds value should increase.4. Income Effects on win over Rates. Assume that the income aim in the euro field of operations rises at a much high rate than does the UK income train. Other things being equal, how should this affect the (a) euro area demand for Britishpounds, (b) supply of British pounds for sale, and (c) equilibrium value of the British pound in terms of the euro? dress Assuming no effect on participation rates, demand for pounds should increase, supply of pounds for sale may not be affected, and the pounds value should increase. 5. Trade Restriction Effects on Exchange Rates. Assume that the Nipponese government relaxes its controls on imports by Japanese companies. Other things being equal, how should this affect the (a) UK demand for Japanese yen, (b) supply of yen for sale, and (c) equilibrium value of the yen?ANSWER Demand for yen should not be affected, supply of yen for sale should increase, and the value of yen should decrease.6. Effects of Real Interest Rates. What is the expected blood between the relative real reside rates of two countries and the exchange rate of their currencies? ANSWER The high the real absorb rate of a country relative to another country, the stronger will be its central office currency, other things equal.7. Speculative Effects on Exchange Rates. Explain why a public suppose about the future value of the euro and about future come to rates by a value economist could affect the value of the euro today. Why do some forecasts by well-respected economists have no bushel on todays value of the euro?ANSWER Interest rate dismissments affect exchange rates. Speculators can use anticipated interest rate scarperments to forecast exchange rate movements. They may decide to secure securities in particular countries because of their expectations about currency movements, since their yield will be affected by changes in a currencys value. These purchases of securities require an exchange of currencies, which can immediately affect the equilibrium value of exchange rates. If a forecast of interest rates by a respected economist was already anticipated by market participants o r is not different from investors original expectations, an announced forecast does not provide new information. Thus, there would be no reaction by investors to such an annunciation, and exchange rates would not be affected.8. Factors Affecting Exchange Rates. What factors affect the future movementsin the value of the euro against the dollar?ANSWER The euros value could change because of the balance of trade, which reflects more U.S. demand for European goods than the European demand for U.S. goods. The capital flows between the U.S. and Europe will also affect the U.S. demand for euros and the supply of euros for sale (to be interchange for dollars).9. Interaction of Exchange Rates. Assume that there are substantial capital flows among the United farming, the United States, and the Euro area. If interest rates in the United Kingdom sinks to a level below the U.S. interest rate, and inflationary expectations tarry unchanged, how could this affect the value of the euro against the U.S. dollar? How might this descend in the United Kingdoms interest rate possibly affect the value of the British pound against the euro? ANSWER If interest rates in the UK decline, there may be an increase in capital flows from the UK to the U.S. In addition, U.S. investors may attempt to trespass on higher U.S. interest rates, dapple U.S. investors reduce their investments in UKs securities. This places downward shove on the ponds value.Euro investors who previously invested in the UK may shift to the U.S. Thus, the increase demand for dollars by euros may increase the value of the dollar in relation to the euro. 10. Trade Deficit Effects on Exchange Rates. Every month, the UK trade famine figures are announced. Foreign exchange traders often react to this annunciation and even attempt to forecast the figures before they are announced.a. Why do you withdraw the trade dearth promulgation sometimes has such an impact on foreign exchange trading?ANSWER The trade deficit announcement may provide a apprehensionable forecast of future trade deficits and therefore has implications about supply and demand conditions in the foreign exchange market. For example, if the trade deficit was larger than anticipated, and is expected to continue, this implies that the UK demand for foreign currencies may be larger than initially anticipated. Thus, the pound would be expected to weaken. Some speculators may take a position in foreign currencies immediately and could cause animmediate decline in the pound. b. In some periods, foreign exchange traders do not respond to a trade deficit announcement, even when the announced deficit is very large. Offer an explanation for such a lack of reaction.ANSWER If the market correctly anticipated the trade deficit figure, then any news contained in the announcement has already been accounted for in the market. The market should only respond to an announcement about the trade deficit if the announcement contains new informatio n. 11. Comovements of Exchange Rates. Explain why the value of the British pound against the dollar will not always move in tandem with the value of the euro against the dollar. ANSWER The euros value changes in receipt to the flow of funds between the U.S. and the countries using the euro or their currency. The pounds value changes in response to the flow of funds between the U.S. and the U.K. As the UK economy is different from the euro economy, economic events will have a different impact, the events themselves may also differ. Assuming that the market is efficient and that the exchange rates do move according to relevant information the fact that the relevant information sets differ justifies a less than perfect correlation of movements. That they are similar is understandable as although different, the differences are not that great.12. Factors Affecting Exchange Rates. In the 1990s, Russia was attempting to import more goods but had little to offer other countries in terms of potential exports. In addition, Russias inflation rate was high. Explain the type of hale that these factors placed on the Russian currency. ANSWER The large amount of Russian imports and lack of Russian exports placed downward pressure on the Russian currency. The high inflation rate in Russia also placed downward pressure on the Russian currency.13. National Income Effects. Analysts commonly attribute the appreciation of a currency to expectations that economic conditions will strengthen. Yet, this chapter suggests that when other factors are held constant, increased national income could increase imports and cause the local currency to weaken. In reality, other factors are not constant. What other factor is likely to be affected by increased economic growth and could place upwardlypressure on the value of the local currency?ANSWER Interest rates escape to rise in response to a stronger economy, and higher interest rates can place upward pressure on the local currency (as long as there is not offsetting pressure by higher expected inflation).14. Factors Affecting Exchange Rates. If the Asian countries experience a decline in economic growth (and experience a decline in inflation and interest rates as a precede), how will their currency values (relative to the British pound) be affected?ANSWER A relative decline in Asian economic growth will reduce Asian demand for UK products, which places upward pressure on Asian currencies. However, given the change in interest rates, Asian corporations with excess cash may now invest in the UK or other countries, thereby increasing the demand for pounds. Thus, a decline in Asian interest rates will place downward pressure on the value of the Asian currencies. The overall impact depends on the magnitude of the forces just depict.15. Impact of Crises. Why do you think most crises in countries (such as the Asian crisis) cause the local currency to weaken abruptly? Is it because of trade or capital flows? ANSWER Capital flows have a larger influence. In general, crises tend to cause investors to expect that there will be less investment in the country in the future and also cause concern that any existing investments will generate poor returns (because of defaults on loans or cut valuations of stocks). Thus, as investors liquidate their investments and convert the local currency into other currencies to invest elsewhere, downward pressure is placed on the local currency. 16. How do you think weaker economic conditions would affect trade flows in a Developing sylvan? How would weaker conditions affect the value of its currency (holding other factors constant)? How do you think interest rates would be affected? ANSWER Weak world economic conditions would aftermath in a reduced demand for foreign products, which results in a decline in the demand for foreign currencies, particularly the currencies of ontogeny countries that rely on exports. Taking the US as the dominant economy there would therefo rebe downward pressure on currencies relative to the dollar (upward pressure on the dollars value). The trim back U.S. interest rates that accompany weaker economic conditions should reduce the capital flows to the U.S., which place downward pressure on the value of the dollar.Advanced Questions17. Measuring Effects on Exchange Rates. Tarheel Co. plans to find how changes in UK and euro real interest rates will affect the value of the British pound. a. Describe a regression model that could be used to achieve this purpose. Also explain the expected sign of the regression coefficient.ANSWER Various models are possible.Based on the model above, the regression coefficient is expected to have a negative sign. A comparatively high real interest rate differential would likely cause a weaker euro value, other things being equal. An appropriate model would also include other independent variables that may influence the percentage change in the pesos value.b. If Tarheel Co. thinks that the existence of a quota in particular historical periods may have affected exchange rates, how might this be accounted for in the regression model? ANSWER A dope variable could be included in the model, assigned a value of one for periods when a quota existed and a value of zero when it did not exist. This answer requires some creative thinking, as it is not drawn today from the text.18. Factors Affecting Exchange Rates. Mexico tends to have much higher inflation than the United States and also much higher interest rates than the United States. Inflation and interest rates are much more volatile in Mexico than in industrialized countries. The value of the Mexican peso is typically more volatile than the currencies of industrialized countries from a U.S. perspective it has typically depreciated from one year to the next, but the degree of depreciation has varied substantially. The cabal/ask spread tends to be wider for the peso than for currencies of industrialized countries.a. Ide ntify the most obvious economic reason for the persistent depreciationof the peso. ANSWER The high inflation in Mexico places continual downward pressure on the value of the peso.b. High interest rates are commonly expected to strengthen a countrys currency because they can encourage foreign investment in securities in that country, which results in the exchange of other currencies for that currency. Yet, the pesos value has declined against the dollar over most years even though Mexican interest rates are typically much higher than U.S. interest rates. Thus, it appears that the high Mexican interest rates do not attract substantial U.S. investment in Mexicos securities. Why do you think U.S. investors do not try to capitalize on the high interest rates in Mexico?ANSWER The high interest rates in Mexico result from expectations of high inflation. That is, the real interest rate in Mexico may not be any higher than the U.S. real interest rate. stipulation the high inflationary expec tations, U.S. investors recognize the potential weakness of the peso, which could more than offset the high interest rate (when they convert the pesos back to dollars at the end of the investment period). Therefore, the high Mexican interest rates do not encourage U.S. investment in Mexican securities, and do not help to strengthen the value of the peso. c. Why do you think the bid/ask spread is higher for pesos than for currencies of industrialized countries? How does this affect a U.S. firm that does substantial business in Mexico? ANSWER The bid/ask spread is wider because the banks that provide foreign exchange services are subject to more risk when they maintain currencies such as the peso that could decline abruptly at any time. A wider bid/ask spread adversely affects the U.S. firm that does business in Mexico because it increases the transactions costs associated with conversion of dollars to pesos, or pesos to dollars.19. Aggregate Effects on Exchange Rates. Assume that th e United Kingdom invests heavily in government and corporate securities of rustic K. In addition, residents of Country K invest heavily in the United Kingdom. Approximately 10 billion worth of investment transactions occur between these two countries each year. The hit pound value of trade transactions per year is about 8 gazillion. This information is expected to also hold in the future. Because your firm exports goods to Country K, your job asinternational cash manager requires you to forecast the value of Country Ks currency (the krank) with respect to the pound. Explain how each of the interest conditions will affect the value of the krank, holding other things equal. Then, aggregate all of these impacts to develop an overall forecast of the kranks movement against the pound.a. UK inflation has suddenly increased substantially, firearm Country Ks inflation remains low. ANSWER Increased UK demand for the krank. lessen supply of kranks for sale. up(a) pressure in the kranks value.b. UK interest rates have increased substantially, while Country Ks interest rates remain low. Investors of both countries are attracted to high interest rates. ANSWER Decreased UK demand for the krank. Increased supply of kranks for sale. Downward pressure on the kranks value.c. The UK income level increased substantially, while Country Ks income level has remained unchanged.ANSWER Increased UK demand for the krank. Upward pressure on the kranks value. d. The UK is expected to impose a small tariff on goods import from Country K. ANSWER The tariff will cause a decrease in the United Kingdom desire for Country Ks goods, and will therefore reduce the demand for kranks for sale. Downward pressure on the kranks value.e. Combine all expected impacts to develop an overall forecast. ANSWER Two of the scenarios described above place upward pressure on the value of the krank. However, these scenarios are related to trade, and trade flows are relatively minor between the UK and Countr y K. The interest rate scenario places downward pressure on the kranks value. Since the interest rates affect capital flows and capital flows dominate trade flows between the UK and Country K, the interest rate scenario should overwhelm all other scenarios. Thus, when considering the importance of implications of all scenarios, the krank is expected to depreciate.20. Speculation. juicy Demon avow expects that the Mexican peso will depreciate against the dollar from its spot rate of $.15 to $.14 in 10 days.The following(a) interbank impart and borrowing rates existU.S. dollarMexican peso modifying Rate8.0%8.5% borrowing Rate8.3%8.7%Assume that Blue Demon pious platitude has a borrowing capacity of either $10 million or 70 million peos in the interbank market, depending on which currency it wants to borrow. a. How could Blue Demon hope attempt to capitalize on its expectations without using deposited funds? Estimate the sugars that could be generated from this strategy. ANSWE R Blue Demon stick can capitalize on its expectations about pesos (MXP) as follows 1. Borrow MXP70 million2. metamorphose the MXP70 million to dollarsMXP70,000,000 $.15 = $10,500,0003. Lend the dollars through the interbank market at 8.0% annualized over a 10-day period. The amount accumulated in 10 days is$10,500,000 1 + (8% 10/360) = $10,500,000 1.002222 = $10,523,333 4. Repay the peso loan. The refund amount on the peso loan is MXP70,000,000 1 + (8.7% 10/360) = 70,000,000 1.002417=MXP70,169,167 5. Based on the expected spot rate of $.14, the amount of dollars needed to pay off the peso loan isMXP70,169,167 $.14 = $9,823,6836. After repaying the loan, Blue Demon Bank will have a speculative profit (if its forecasted exchange rate is accurate) of$10,523,333 $9,823,683 = $699,650b. Assume all the preceding information with this exception Blue Demon Bankexpects the peso to appreciate from its present spot rate of $.15 to $.17 in 30 days. How could it attempt to capitaliz e on its expectations without using deposited funds? Estimate the profits that could be generated from this strategy.ANSWER Blue Demon Bank can capitalize on its expectations as follows 1. Borrow $10 million2. diversify the $10 million to pesos (MXP)$10,000,000/$.15 = MXP66,666,6673. Lend the pesos through the interbank market at 8.5% annualized over a 30-day period. The amount accumulated in 30 days isMXP66,666,667 1 + (8.5% 30/360) = 66,666,667 1.007083 = MXP67,138,889 4. Repay the dollar loan. The repayment amount on the dollar loan is $10,000,000 1 + (8.3% 30/360) = $10,000,000 1.006917 = $10,069,170 5. win over the pesos to dollars to repay the loan. The amount of dollars to be received in 30 days (based on the expected spot rate of $.17) isMXP67,138,889 $.17 = $11,413,6116. The profits are determined by estimating the dollars lendable after repaying the loan $11,413,611 $10,069,170 = $1,344,44121. Speculation. infield Bank expects that the Singapore dollar will dep reciate against the euro from its spot rate of 0.48 euros to 0.45 euros in 60 days. The following interbank lending and borrowing rates existLending RateeuroSingapore dollar7.0%22.0%Borrowing Rate7.2%24.0%Diamond Bank considers borrowing 10 million Singapore dollars in the interbank market and investing the funds in euros for 60 days. Estimate the profits (or losses) that could be earned from this strategy. Should Diamond Bank pursue this strategy?ANSWERBorrow S$10,000,000 and convert to eurosS$10,000,000 0.48 = 4,800,000 eurosInvest funds for 60 days. The rate earned in the euros for 60 days is 7% (60/360) = 1.17%Total amount accumulated in 60 days4,800,000 euros (1 + .0117) = 4,856,160 euros win over euros back to S$ in 60 days4,856,160 /0.45 = S$10,791,467The rate to be paid on loan is.24 (60/360) = .04Amount owed on S$ loan isS$10,000,000 (1 + .04) = S$10,400,000This strategy results in a profitS$10,791,467 S$10,400,000 = S$391,467Diamond Bank should pursue this strategy.B lades plc caseful StudyAs the chief financial officer of Blades plc Ben Holt is pleased that his current system of exporting Speedos to siamese connectionland seems to be working well. Blades capital customer in Siameseland, a retailer called Entertainment Products, has commit itself to purchasing a fixed number of Speedos annually for the next three years at a fixed price denominated in tical, siamese connectionlands currency. Furthermore, Blades is using a Thai supplier for some of the components needed to manufacture Speedos. Nevertheless, Holt is concerned about recent developments in Asia. Foreign investors from various countries had invested heavily in Thailand to take advantage of the high interest rates there. As a result of the weak economy in Thailand, however,many foreign investors have illogical confidence in Thailand and have withdrawn their funds.Ben Holt has two major concerns regarding these developments. First, he is wondering how these changes in Thailands economy could affect the value of the Thai baht and, consequently, Blades. More specifically, he is wondering whether the effects on the Thai baht may affect Blades even though its primary Thai customer is committed to Blades over the next three years. Second, Holt believes that Blades may be able to speculate on the anticipated movement of the baht, but he is uncertain about the procedure needed to accomplish this. To facilitate Holts understand of exchange rate speculation, he has asked you, Blades financial analyst, to provide him with detailed illustrations of two scenarios. In the first, the baht would move from a current level of 0.0147 to 0.0133 within the next 30 days. Under the second scenario, the baht would move from its current level to 0.0167 within the next 30 days.Based on Holts needs, he has provided you with the following list of questions to be answered 1. How are percentage changes in a currencys value mensural? expound your answer numerically by assuming a c hange in the Thai bahts value from a value of 0.0147 to 0.0173. 2. What are the basic factors that determine the value of a currency? In equilibrium, what is the relationship between these factors?3. How might the relatively high levels of inflation and interest rates in Thailand have affected the bahts value? (Assume a constant level of UK inflation and interest rates.) 4. How do you think the loss of confidence in the Thai baht, evidenced by the separation of funds from Thailand, affected the bahts value? Would Blades be affected by the change in value, given the primary Thai customers commitment?5. Assume that Thailands central bank wishes to foresee a withdrawal of funds from its country in order to counteract further changes in the currencys value. How could it accomplish this objective using interest rates?6. Construct a spreadsheet illustrating the steps Blades treasurer would need to follow in order to speculate on expected movements in the bahts value over the next 30 da ys. Also show the speculative profit (in pounds) resulting from each scenario. commit both of Ben Holts examples to illustrate possible speculation. Assume that Blades can borrow either 7 million or the baht equivalent of this amount. Furthermore, assume that the following short-term interest rates (annualized) are available to Blades CurrencyDollarsThai bahtLending Rate8.10%14.80%Borrowing Rate8.20%15.40%Solution to Continuing Case Problem Blades.1. How are percentage changes in a currencys value measured? Illustrate your answer numerically by assuming a change in the Thai bahts value from a value of 0.0147 to 0.0173. ANSWER The percentage change in a currencys value is measured as follows%SStSt11where 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 foreign currency, while a negative percentage change represents depreciation.In the example provided, the percentage change in the Thai baht wo uld be = 17.69%0.0173 0.01470.0147That is, the baht would be expected to appreciate by 17.69%. 2. What are the basic factors that determine 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 demand for the currency. A high level of supply of a currency generally decreases the currencys value, while a high level of demand for a currency increases its value. In equilibrium, the supply of the currency equals the demand for the currency. 3. How might the relatively high levels of inflation and interest rates have affected the bahts value? (Assume a constant level of UK inflation and interest rates.) ANSWER The baht would be affected both by inflation levels and interest rates in Thailand relative to levels of these variables in the UK. A high level of inflation tends to result in currency depreciation, as it would increase the Thai demand for UK goods, causing an increase in the Thai demand for dollars. Furthermore, a relatively high level of Thai inflation would reduce the UK 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 dollar. A relatively high level of interest rates in Thailand would have rendered investments there more attractive for UK investors, causing an increase in the demand for baht. Furthermore, UK 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 ch ange 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 belike be affected by the change in value even though its Thai customers 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 pounds.5. Assume that Thailands central bank wishes to prevent 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 UK 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 need to follow in order to speculate on expected movements in the bahts value over the next 30 days. Also show the speculative 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 BladesCurrencyDollarsThai bahtLending Rate8.10%14.80%Borrowing Rate8.20%15.40%ANSWER (See spreadsheet attached.)Depreciation of the Baht from 0.0147 to 0.01331. Borrow Thai baht (10,000,000/0.0147)2. Convert the Thai baht to pounds 680,272,109 baht 0.0147). 3. Lend the pounds at 8.10% annualized, which represents a 0.68% return 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 loan repayment (on Day 30) to repay 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 total baht amount unavoidable to repay the loan is therefore (680,272,109 (1 + .0128))680,272,10910,000,00010,068,000.00688,979,5925. Number of pounds necessary to repay baht loan (688,979,592 baht 0.0133)9,163,4296. Speculative profit (10,068,000 9,163,429)904,571Appreciation of the Baht from 0.0147 to 0.01671. Borrow pounds.2. Convert the pounds to Thai baht (10 million/0.0147).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,10,000,000.00680,272,109Blades would receive (THB 680,272,109 (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 borrow ed 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 (10,068,000.00/0.0167) 6. Speculative profit (THB688,639,456 THB602,874,251)7. Dollar equivalent of speculative profit (THB 85,765,2050.0167)688,639,45610,068,000.00602,874,25185,765,2051,432,278Blades would be ill advised to speculate in this way as it is not a specialist in the financial markets and does not have specialist abilities or information to use. These actions are thyerfore little better than gambling and are highly ill advised.Small Business DilemmaAssessment by the Sports Exports Company of Factors That Affect the British Pounds Value1. Given Jims expectations, forecast whether the pound will appreciate or depreciate against the euro over time.ANSWER The pound should depreciate because the British inflation is expected to be higher than the euro. This could ca use a shift in trade flows that would place downward pressure on the pounds value. The interest rate movements of both countries are expected to be similar for both countries. Therefore, there should not be any adjustment in the capital flows between the two countries.2. Given Jims expectations, will the Sports Exports Company be favourably or unfavourably affected by the future changes in the value of the pound?ANSWER The Sports Exports Company will be unfavourably affected, because depreciation in the British pound will cause the pound receivables to convert into fewer euros.