(b) 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 24 baht). Suppose with probability 0.2 the 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 1 dollar to 40 baht. Given this information, what is the investor's expected profit from the speculative attack (in terms of US dollar)?
(b) 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 24 baht). Suppose with probability 0.2 the 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 1 dollar to 40 baht. Given this information, what is the investor's expected profit from the speculative attack (in terms of US dollar)?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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[Speculative Attack]
Exchange Rate of 1 dollar to 24 Baht with a Foreign reserve of 40 billion US dollars
Transcribed Image Text:(b) 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 24 baht). Suppose with probability 0.2 the 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 1 dollar to 40 baht. Given this information, what is the
investor's expected profit from the speculative attack (in terms of US dollar)?
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