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 B24.9​/$ in July​ 1997, Siam's interest payments alone were over​ $900 million on its outstanding dollar debt​ (with an average interest rate of 7.75​% on its U.S. dollar debt at that​ time). Assuming Siam Cement took out $ 48 million in debt in June 1997 at 7.75​% ​interest, and had to repay it in one year when the spot exchange rate had stabilized at Upper B 42.1 divided by $​, what was the foreign exchange loss incurred on the​ transaction

Answer 1

Answer : B889,584,000

Explanation

Value of loan in Thai baht in June 1997 = loan in dollars*exchange rate = $48,000,000*B24.9/$ = B1,195,200,000‬

Interest for one year on dollar loan = loan amount*interest rate = $48,000,000*7.75% = $3,720,000

Total amount to be repaid in one year = loan amount + interest = $48,000,000 + $3,720,000‬ = $51,720,000

Foreign exchange loss = (exchange rate in one year - exchange rate before one year)*Total amount to be repaid in one year

Foreign exchange loss = (B42.1/$ - B24.9/$)*$51,720,000 = B17.2/$*$51,720,000 = B889,584,000