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 B25.0/$ in July 1997, Siam’s interest payments alone were over $900 million on its outstanding dollar debt (with an average interest rate of 8.40% on its U.S. dollar debt at that time). Assuming Siam Cement took out $100 million in debt in June 1997 at 8.40% interest, and had to repay it in one year when the spot exchange rate had stabilized at B42.0/$, what was the foreign exchange loss incurred on the transaction?            million Bahts.   

		1750.4
		1072.8
		1132.8
		1622.8
		1842.8
		1539.8

Answer 1

Answer :

We are given that,

US dollar debt in june 1997 = $100,000,000

US borrowing rate = 8.40%

Spot exchange rate 1997 = 25.00 baht/$

Average spot rate 1998 = 42.00 baht/$

Now,

First determine the total payment owed as follows:

Total payment owed = $100,000,000 * ( 1 + 0.084 )

= $108,400,000

Convert to bhat = $108,400,000 * 25 bhat/$

= 2,710,000,000 bhats

Next, calculate the amount company SC oewd in their actual repayment by first calculating their total repayment using the spot rate in 1998.

Total repayment = $108,400,000 * 42 bhat/$

= 4,552,800,000 bhats

Therefore,

Foreign exchange loss incurred on the transaction = 4,552,800,000 - 2,710,000,000

= 1,842,800,000 bhats

The answer is option (5) i.e., 1842.8 million bhats.