international cash management 253110

1. There is a tradeoff between the higher interest rates in Thailand and the delayed conversion of baht into dollars. What does this mean?

2. If the net baht received from the Thailand subsidiary are invested in Thailand, how will U.S. operations be affected?

3. Construct a spreadsheet that compares the cash flows resulting from the two plans. Under the first plan, net baht-denominated cash flows (received today) will be invested in Thailand at 15 percent for a one-year period, after which the baht will be converted to dollars. Under the second plan, net baht-denominated cash flows are converted to dollars immediately and 60 percent of the funds will be used to support U.S. operations, while 40 percent are invested in the United States for one year at 8 percent. Which plan is superior given the expectation of the baht’s value in one year?


Recall from Chapter 20 that the new Thailand subsidiary of Blades, Inc., received a one-time order from a customer for 120,000 pairs of ?oSpeedos,?? Blades’ primary product. There is a 6-month lag between the time when Blades needs funds to purchase material for the production of the Speedos and the time when it will be paid by the customer. Ben Holt, Blades’ chief financial officer (CFO), has decided to finance the cost by borrowing Thai baht at an interest rate of 6 percent over a 6-month period. Since the average cost per pair of Speedos is approximately 3,500 baht, Blades will borrow 420 million baht. The payment for the order will be used to repay the loan’s principal and interest. Ben Holt is currently planning to instruct the Thai subsidiary to remit any remaining baht-denominated cash flows back to the United States. Just before Blades receives payment for the large order, however, Holt notices that interest rates in Thailand have increased substantially. Blades would be able to invest funds in Thailand at a relatively high interest rate compared to the U.S. rate. Specifically, Blades could invest the remaining baht-denominated funds for one year in Thailand at an interest rate of 15 percent.

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