Question

1. Consider two Thai firms listed on the Bangkok stock exchange:
   • Thai A is a mining company that exports a large part of its minerals production. Much larger competitors can be found in Latin and North America. The market price of its production is largely determined in dollars on the world market.
   • Thai B imports various engine parts from Europe and the United States. The demand for its product is highly price elastic. A significant rise in baht prices lowers the demand. What will happen to the earnings and stock prices of the two companies if there is a sudden and large devaluation of the Thai baht against major currencies?

Answer 1

Thai A is a mining company that exports a large part of its minerals production. Much larger competitors can be found in Latin and North America. The market price of its production is largely determined in dollars on the world market.

In the Case of Thai A the company is exporting mineral production to outside world. when currency of Thai Baht devalues against major currencies the absolute value of Thai baht per major currencies will increase Lets say now the currency value is 100 Thai Baht per Dollar when the currency gets devalued the absolute value increases like 120 Thai Baht per dollar which results in the value of cash inflows in Thai Baht increases which in turn increases the net income thereby EPS and Stock Price

Thai B imports various engine parts from Europe and the United States. The demand for its product is highly price elastic. A significant rise in baht prices lowers the demand. What will happen to the earnings and stock prices of the two companies.

In the Case of Thai B the company is importing engine parts from Europe and United States. when currency of Thai Baht devalues against major currencies the absolute value of Thai baht per major currencies will increase Lets say now the currency value is 100 Thai Baht per Dollar when the currency gets devalued the absolute value increases like 120 Thai Baht per dollar. Now in Thailand the Thai B cannot increase the price of price of product because it would result in reduction demand. So the company pays higher price to get engine parts. when cost increases with no or little increase revenue will lead to decrease in net income and thereby stock prices and EPS

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