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Assume Thailand unilaterally defends an exchange rate of 1 dollar to 24 baht with a foreign...

Assume Thailand unilaterally defends an exchange rate of 1 dollar to 24 baht with a foreign reserve of 40 billion US dollar. Suppose an investor wants to implement a speculative attack on baht.

Suppose the investor borrows just enough baht for the attack and the transaction cost for this borrowing is 800 million dollar. The investor sells all his baht in the foreign exchange market to buy US dollars (at the rate of 1 dollar to 24baht). Suppose with probability 0.2the attack is successful and the Thai government runs out of foreign reserve. If the attack is successful, then the Thai government devalues baht and the new exchange rate would be 1dollar to 40 baht. Given this information, what is the investor’s expected profit from the speculative attack (in terms of US dollar)?

Math   Statistics-And-Probability   
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