Q1. Determine how the percentage changes in a currency’s value measured?
Percentage change in currencies is measured using the following formula:
Spot rate-Spot rate1 / Spot rate 1
The spot rate 1 is the currency rate at the earlier date whereas spot rate is the rate at the latter date.
Using the formula the answer will be as follows:
0.026-0.022/0.022
=18.1888%
In this case this is a positive answer which means that it is an appreciation of the currency.
Q2. The basic factors that determine the value of a currency include the demand for the currency and the supply of the currency (DD and SS). At equilibrium, these factors are constant and therefore the value of the currency correctly placed. As it I=is the common scenario, when the supply of the currency is low, there is high value and vice-versa. A case of high demand in currency leads to high increase in its value.
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Q3. The high levels of inflation will lead to the baht currency to be depreciated. As it is the case, the inflation decreases purchase power and therefore devalue or depreciate the currency. This would be done by increasing the demand for the goods from US than Thailand and therefore more imports and higher need for the USA dollar.
Moreover, a case of very high interest rates will lead to the Thailand currency-bhat to increase in value compared to the USD.
Q4. The withdrawal of foreign currency will lead to devaluing the baht currency and lead to problems to Thailand when exporting their goods and services as it currency will be weaker and unwanted by the foreign countries. Blade will be affected significantly even though its main customer transact with the company in bhat currency.
Q5. The central bank will only be able to do this by increasing the interest rates in Thailand. Likewise the bank would place very low taxes on foreign income and low interests to boost economic development through increase of foreign investment. Form alliances with foreign countries such as the US which would control the interest rates.
THB to depreciate
Step 1 THB with 454545455 and convert it using spot rate 0.022 rate
Step 2 THB Hold $10 million and lend it at an interest rate of 8.10% for a month period
$10 million * (0.081*30/360 + 1)
Step 3 Exchange the $10,067,500 using rate $0.02/THB
Step 4 Hold the THB 503,375,000 and borrow it for 30 days again
Profit earned will be found by 503,375,000–460, 378, 788 = 42, 996, 212
THB to appreciate
Step 1 Borrow $10 million convert it using spot rate 0.022 rate/THB
Step 2 THB Hold 454545455and lend it at an interest rate of 14.0% for a month period
454545455* (0.148*30/360 + 1)
Step 3 Exchange the 460, 151, 515using rate $0.025/THB
Step 4 Hold the $ 11, 503, 788 503 and borrow it for 30 days again
Profit earned will be found by $ 11, 503, 788 503 – 10, 068, 333 = $1, 435, 455
