East Asiatic-Thailand. The East Asiatic Company (EAC), a Danish company with subsidiaries throughout Asia, has been funding its Bangkok subsidiary primarily with U.S. dollar debt because of the cost and availability of dollar capital as opposed to Thai baht-denom (THB) debt. The treasurer of EAC-Thailand is considering a 1-year bank loan for USD252,000. The current spot rate is THB32.03 = USD1.00, and the dollar-based interest is 6.71% for the 1-year period. 1-year loans are 11.97% in baht. a. Assuming expected inflation rates for the coming year of 4.1% and 1.25% in Thailand and the United States, respectively, according to purchase power parity, what would be the effective cost of funds in Thai baht terms? b. If EAC's foreign exchange advisers believe strongly that the Thai government wants to push the value of the baht down against the dollar by 5% over the coming year (to promote its export competitiveness in dollar markets), what might be the effective cost of funds in baht terms? c. If EAC could borrow Thai baht at 13.00% per annum, would this be cheaper than either part (a) or part (b)? a. Assuming expected inflation rates for the coming year of 4.1% and 1.25% in Thailand and the United States, respectively, according to purchase power parity, what would be the effective cost of funds in Thai baht terms? The effective cost of funds, in baht terms, is ☐ %. (Round to three decimal places.)
East Asiatic-Thailand. The East Asiatic Company (EAC), a Danish company with subsidiaries throughout Asia, has been funding its Bangkok subsidiary primarily with U.S. dollar debt because of the cost and availability of dollar capital as opposed to Thai baht-denom (THB) debt. The treasurer of EAC-Thailand is considering a 1-year bank loan for USD252,000. The current spot rate is THB32.03 = USD1.00, and the dollar-based interest is 6.71% for the 1-year period. 1-year loans are 11.97% in baht. a. Assuming expected inflation rates for the coming year of 4.1% and 1.25% in Thailand and the United States, respectively, according to purchase power parity, what would be the effective cost of funds in Thai baht terms? b. If EAC's foreign exchange advisers believe strongly that the Thai government wants to push the value of the baht down against the dollar by 5% over the coming year (to promote its export competitiveness in dollar markets), what might be the effective cost of funds in baht terms? c. If EAC could borrow Thai baht at 13.00% per annum, would this be cheaper than either part (a) or part (b)? a. Assuming expected inflation rates for the coming year of 4.1% and 1.25% in Thailand and the United States, respectively, according to purchase power parity, what would be the effective cost of funds in Thai baht terms? The effective cost of funds, in baht terms, is ☐ %. (Round to three decimal places.)
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
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Transcribed Image Text:East Asiatic-Thailand. The East Asiatic Company (EAC), a Danish company with subsidiaries throughout Asia, has been funding its Bangkok subsidiary primarily with U.S. dollar debt because of the cost and availability of dollar capital as opposed to Thai baht-denominated
(THB) debt. The treasurer of EAC-Thailand is considering a 1-year bank loan for USD252,000. The current spot rate is THB32.03 = USD1.00, and the dollar-based interest is 6.71% for the 1-year period. 1-year loans are 11.97% in baht.
a. Assuming expected inflation rates for the coming year of 4.1% and 1.25% in Thailand and the United States, respectively, according to purchase power parity, what would be the effective cost of funds in Thai baht terms?
b. If EAC's foreign exchange advisers believe strongly that the Thai government wants to push the value of the baht down against the dollar by 5% over the coming year (to promote its export competitiveness in dollar markets), what might be the effective cost of funds in
baht terms?
c. If EAC could borrow Thai baht at 13.00% per annum, would this be cheaper than either part (a) or part (b)?
a. Assuming expected inflation rates for the coming year of 4.1% and 1.25% in Thailand and the United States, respectively, according to purchase power parity, what would be the effective cost of funds in Thai baht terms?
The effective cost of funds, in baht terms, is ☐ %. (Round to three decimal places.)
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