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.
1539.8 |
||
1132.8 |
||
1622.8 |
||
1750.4 |
||
1842.8 |
||
1072.8 |
Answer :
Given that,
US dollar debt in June 1997 = $100,000,000
US borrowing rate = 8.40%
Spot exchange rate in 1997 = 25.0 bhat/$
Average spot rate in 1998 = 42.0 bhat/$
First, determine the total payment owed as follows:
Total payment owed = $100,000,000 * ( 1 + 0.084 )
= $108,400,000
Now,
Convert to bhat = $108,400,000 * 25 bhat/$
= 2,710,000,000 bhats
Then,
calculate the amount company SC owed 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.
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