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    Foreign exchange loss

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    Siam Cement, the Bangkok based cement manufacturer suffered enormous losses in the Asian crisis in 1997. The company had been pursuing a very aggressive growth strategy in the mid 1990s, taking on massive quantities of foreign currency denominated debt (primarily U.S dollars). When the Thai Baht was devalued from its pegged rate of B25.0/$ in July 1997, Siam's interest payments alone were over $900 million on its outstanding dollar debt (with an average interest rate of 8.40% on its U.S dollar debt at that time). Assuming that 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?

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    Solution Preview

    Please see the attached file.

    Amount of loan= $50,000,000
    Interest rate= 8.40%
    Principal and interest to be repaid at the end of ...

    Solution Summary

    The solution calculates the foreign exchange loss incurred when a company took on massive quantities of foreign currency denominated debt and the domestic currency depreciated.