What might be the effective cost of funds in baht? terms

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Reference no: EM133376564

Question: 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 (B) debt. The treasurer of? EAC-Thailand is considering a? 1-year bank loan for $252,000. The current spot rate is B32.07?/$, and the? dollar-based interest is 6.79?% for the? 1-year period.? 1-year loans are 12.03?% in baht.

a. Assuming expected inflation rates for the coming year of 4.3?% 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??

Reference no: EM133376564

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