Question

10.3 Siam Cement. 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 for- eign currency denominated debt (primarily U.S. dol- lars). When the Thai baht (B) was devalued from its pegged rate of B25.0/$ in July 1997, Siam's interest payments alone were over $900 million on its out- standing dollar debt (with an average interest rate of 8.40% on its U.S. dollar debt at that time). Assuming Siam Cement took out $50 million in debt in June 1997 at 8.40% interest, and had to repay it in one year when the spot exchange rate had stabilized at B42.0/$, what was the foreign exchange loss incurred on the transaction?

Answer 1

Value of loan in Thai baht in June 1997 = loan in dollars*exchange rate = $50,000,000*B25.0/$ = B1,250,000,000‬

Interest for one year on dollar loan = loan amount*interest rate = $50,000,000*8.4% = $4,200,000‬

Total amount to be repaid in one year = loan amount + interest = $50,000,000 + $4,200,000‬ = $54,200,000

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

foreign exchange loss = (B42.0/$ - B25.0/$)*$54,200,000 = B17.0/$*$54,200,000 = B921,400,000‬