Final answer:
Ted's Brewery faces exchange rate risk due to potential losses from fluctuating exchange rates between the U.S. dollar and the Thai baht. Exchange rate risk can result in a lower value of Ted's baht holdings when converted back to U.S. dollars. Ted's Brewery will likely need to use hedging strategies to manage this risk.
Step-by-step explanation:
The uncertainty that Ted's Brewery faces regarding the U.S. dollar value of its holdings of Thai currency (baht) is an example of exchange rate risk. The exchange rate risk occurs when there is potential for a loss due to the fluctuation in the exchange rate between two currencies. In this case, Ted's Brewery is subjected to this risk because it holds a large amount of baht, and any changes in the exchange rate between the U.S. dollar and the baht could affect the value of these holdings in terms of U.S. dollars.
For instance, if Ted's Brewery converts its revenue from baht to dollars at a rate of 40 baht/dollar, but later the exchange rate shifts to 50 baht/dollar, the value of the baht, when converted to dollars, would decrease. If the exchange rate shifts in a way that the baht weakens against the dollar, Ted's Brewery would receive fewer U.S. dollars for the same amount of baht. This could result in a loss when converting the proceeds back to U.S. dollars or an increased cost for future purchases of beer from Thailand.
In the business arena, it is crucial for a company like Ted's Brewery to manage this risk, commonly through hedging strategies using financial instruments such as forwards, futures, options, or swaps, to protect their finances from the negative outcomes attributed to exchange rate fluctuations.