Blades, Inc. Case Study Analysis Paper Essay

Blades, Inc. Case Study Analysis PaperFactors of Foreign Exchange RatesExchange pass judgment are the amount of one countrys bullion needed to purchase one unit of an some other currency and the foreign exchange market is the monetary nexus between countries that makes it possible for spheric trade to be accomplished more efficiently than barter. The foreign exchange market is where one countries currency is exchanged for another because each acres uses its own monetary unit. Therefore, if people in one nation want to acquire goods in another nation, currency must be replaced from one country for the other country to accommodate the business deal.Foreign exchange judge, at the most basic level, are derived from long-run economic fundamentals. These variables weigh and measure the value of one currency to another. Over time, these economic fundamentals and macro-factors volition lead to very long-term trends. From the fundamentalists perspective, the main factors that affect f oreign exchange straddles are Interest roves, Trade balance, Inflation, GDP (Gross Domestic Product), and Employment Statistics.See more how to write an compendium paperCase SummaryBlades, Inc. needed to order supplies cardinal months ahead of the tar date. The company considered an order from a Japanese supplier that required a payment of 12.5 million pine payable as of the delivery date. Blades had two choices to each purchase two call preferences contracts (since each pick contract represented 6,250,000 languish) or purchase one futures contract (which represented 12.5 million hankering).The futures expenditure on yen had diachronicly exhibited a slight discount from the existing spot rate. However, the hearty would drive home liked to use currency options to table payables in Japanese yen for transactions two months in advance. Blades would have preferred hedging their yen payable positions because the company was uncomfortable leaving the position open given the historical volatility of the yen. Nevertheless, the whole was willing to remain unweasel-worded if the yen became more stable someday.Ben Holt, Blades chief financial officer (CFO), preferred the tractableness that options offer over forward contracts or futures contracts because hecould let the options expire if the yen depreciates. He would have liked to use an shape price that was about 5% above the existing spot rate to ensure that Blades would have to pay no more than 5% above the existing spot rate for a transaction two months beyond its order date, as long as the option bountifulness was no more than 1.6% of the price it would have to pay per unit when exercising the option.In general, options on the yen have required a premium of about 1.5% of the total transaction amount that would be nonrecreational if the option is cropd. For example, recently the yen spot rate was $0.0072, and the firm purchased a call option with an exercise price of $0.00756, which is 5% above the existing spot rate. The premium for this option was $0.0001134, which is 1.5% of the price to be paid per yen if the option is exercised.A recent event caused more uncertainty about the yens future value, although it did not affect the spot rate or the forward or futures rate of the yen. Specifically, the yens spot rate was still $0.0072, but the option premium for a call option with an exercise price of $0.00756 was now $0.0001512. An alternative call option was lendable with an expiration date of two months from now and had a premium of $0.0001134 (which is the size of the premium that would have existed for the option desired before the event), but it is for a call option with an exercise price of $.00792.The table below summarized the option and futures information available to BladesBefore EventAfter EventSpot Rate$.0072$.0072$.0072 alternative InformationExercise price ($)$.00756$.00756$.00792Exercise price (% above spot)5%5%10%Option premium (% of exercise price)$.00011 34$.0001512$.0001134Total premium ($)1.5%2.0%1.5%Amount paid for yen if option is exercised(not including premium)$1,417.50$1,890.00$1,417.50Futures Contract Information$94,500$94,500$99,000Futures price$.006912$.006912Formulated Answers1. If Blades uses call options to hedge its yen payables, I believe the firm should use the call option with the exercise price of $0.00792 rather than the call option with the exercise price of $0.00756 because the amount paid for yen if option is exercised is $472.50 less than the exerciseprice of $0.00756.2. Blades should allow its yen position to be unhedged because the tradeoff to be hedged is not much different from if it were unhedged. However, if the company is uncomfortable leaving the position open given the historical volatility of the yen, then hedging is the best option.3. Assuming there were speculators who attempted to capitalize on their foretaste of the yens movement over the two months between the order and delivery dates by either buying or selling yen futures now and buying or selling yen at the future spot rate, the expectation on the order date of the yen spot rate by the delivery date would be $0.0072, if speculations were correct.4. If the firm shares the market consensus of the future yen spot rate, its optimal choice, purely on a cost basis should be $0.0072 given this expectation and given that the firm do a decision.5. The choice I made as to the optimal hedging strategy may not turn out to be the lowest-cost alternative in terms of actual costs incurred because the firm is speculating the stake. The firm is hedging due to being unsure of what the market will do. The perfect hedge would reduce the risk to nothing. This would be the optimal hedging strategy.6. Assuming that I have determined the historical standard diversion of the yen is about $0.0005. Based on my assessment, I believe the future spot rate is exceedingly unlikely to be more than two standard deviations above the expected spot r ate by the delivery date. If the futures price remains at its current level of $0.006912, the optimal hedge for the firm is $0.007326.ReferencesCambridge mercenary Group (2007). Economic Factors in Forex. Retrieved November 20, 2007,from www.cambridgefx.comMadura, J (2006). International Financial Management (8th ed.). Mason, OH Thomson.Retrieved November 6, 2007, from University of Phoenix, Resource, FIN403-Global Finance Website.