East Asiatic CompanyâThailand. The East AsiaticCompanyâ (EAC), a Danish company with subsidiaries throughoutâAsia, has been funding its Bangkok subsidiary primarily with U.S.dollar debt because of the cost and availability of dollar capitalas opposed to Thaiâ baht-denominated (B) debt. The treasurer ofâEAC-Thailand is considering aâ 1-year bank loan for $249,000. Thecurrent spot rate is B32.07â/$, and theâ dollar-based interest is6.76â% or theâ 1-year period. â 1-year loans are 11.97â% inbaht.
a. Assuming expected inflation rates of 4.5â% and 1.22â% inThailand and the Unitedâ States, respectively, for the comingâyear, according to purchase powerâ parity, what would the effectivecost of funds be in Thai bahtâ terms? (Round to three decimalplaces).
b. Ifâ EAC's foreign exchange advisers believe strongly that theThai government wants to push the value of the baht down againstthe dollar by 5â% over the coming yearâ (to promote its exportcompetitiveness in dollarâ markets), what might the effective costof funds end up being in bahtâ terms?
c. If EAC could borrow Thai baht at 13.00â% perâ annum, wouldthis be cheaper than either partâ (a) or partâ (b) above?
East Asiatic CompanyâThailand. The East AsiaticCompanyâ (EAC), a Danish company with subsidiaries throughoutâAsia, has been funding its Bangkok subsidiary primarily with U.S.dollar debt because of the cost and availability of dollar capitalas opposed to Thaiâ baht-denominated (B) debt. The treasurer ofâEAC-Thailand is considering aâ 1-year bank loan for $249,000. Thecurrent spot rate is B32.07â/$, and theâ dollar-based interest is6.76â% or theâ 1-year period. â 1-year loans are 11.97â% inbaht.
a. Assuming expected inflation rates of 4.5â% and 1.22â% inThailand and the Unitedâ States, respectively, for the comingâyear, according to purchase powerâ parity, what would the effectivecost of funds be in Thai bahtâ terms? (Round to three decimalplaces).
b. Ifâ EAC's foreign exchange advisers believe strongly that theThai government wants to push the value of the baht down againstthe dollar by 5â% over the coming yearâ (to promote its exportcompetitiveness in dollarâ markets), what might the effective costof funds end up being in bahtâ terms?
c. If EAC could borrow Thai baht at 13.00â% perâ annum, wouldthis be cheaper than either partâ (a) or partâ (b) above?
