Question

Siam​ Cement, the​ Bangkok-based cement​ manufacturer, suffered enormous losses with the coming of the Asian crisis in 1997. The company had been pursuing a very aggressive growth strategy in the​ mid-1990s, taking on massive quantities of​ foreign-currency-denominated debt​ (primarily U.S.​ dollars). When the Thai baht​ (B) was devalued from its pegged rate of

B24.524.5​/$

in July​ 1997, Siam's interest payments alone were over​ $900 million on its outstanding dollar debt​ (with an average interest rate of

8.048.04​%

on its U.S. dollar debt at that​ time). Assuming Siam Cement took out

$ 49$49

million in debt in June 1997 at

8.048.04​%

​interest, and had to repay it in one year when the spot exchange rate had stabilized at

Upper B 41.5 divided by $B41.5/$​,

what was the foreign exchange loss incurred on the​ transaction?

Answer 1

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Answer:

USD denominated loan_June1997 Principal to be repaid = $ 49,000,000

USD denominated loan_June1997 Interest to be repaid = $ 49 Million * 8.04% = $ 3,939,600

Total repayment = $ 49,000,000 + $ 3,939,600 = $ 52,939,600

At time loan was acquired, exchange rate was 24.5 Baht = $1, estimated repayments in Baht

= $52,939,600 * 24.5 B/$

= Baht 1,297,020,200 ...(1)

At time of actual payment, exchange rate was 41.5 Baht = $1, actual total repayment in Baht

= $52,939,600 * 41.5 B/$

= Baht 2,196,993,400 ...(2)

Foreign Exchange loss incured on transaction (in Baht denomination) = (2) - (1) = 2,196,993,400 - 1,297,020,200

= Baht 899,973,200