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Unformatted text preview: Problem 11.1 Siam Cement Assumptions Value US dollar debt taken out in June 1997 $50,000,000 US dollar borrowing rate on debt 8.400% Initial spot exchange rate, baht/dollar, June 1997 25.00 Average spot exchange rate, baht/dollar, June 1998 42.00 Calculation of Foreign Exhange Loss on Repayment of Loan At the time the loan was acquired, the scheduled repayment of dollar and baht amounts would have been as follows: Scheduled Repayment: Repayment of US dollar debt: Principal $50,000,000 Repayment of US dollar debt: Interest 4,200,000 Total repayment $54,200,000 Exchange rate at time of repayment, baht/dollar 25.00 Total repayment in Thai baht 1,355,000,000 Total proceeds from loan, up-front, in Thai baht 1,250,000,000 Net interest to be paid, in Thai baht 105,000,000 Actual Repayment: Repayment of US dollar debt: Principal $50,000,000 Repayment of US dollar debt: Interest 4,200,000 Total repayment $54,200,000 Exchange rate at time of repayment, baht/dollar 42.00 Total repayment in Thai baht 2,276,400,000 Less what Siam had EXPECTED or SCHEDULED to be repaid (1,355,000,000) Amount of foreign exchange loss on debt in baht 921,400,000 Siam Cement, the Bangkok-based cement manufacturer, suffered enormous losses with the coming of the Asian crisis in 1997. The company had been pursuing a very aggressive growth strategy in the mid- 1990s, taking on massive quantities of foreign currency denominated debt (primarily U.S. dollars). When the Thai baht (B) was devalued from its pegged rate of B25.0/$ in July 1997, Siam’s interest payments alone were over $900 million on its outstanding 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? Problem 11.2 Hindustan Lever Assumptions Values 180-day account payable, Japanese yen (¥) 8,500,000 Spot rate (¥/$) 120.60 Spot rate, rupees/dollar (Rs/$) 47.75 Implied (calculated) spot rate (¥/Rs) 2.5257 (120.60 / 47.75) 2.4000 2.6000 180-day Indian rupee investing rate 8.000% 180-day Japanese yen investing rate 1.500% Currency agent's exchange rate fee 4.850% Hindustan Lever's cost of capital 12.00% Spot Risk Hedging Alternatives Values Rate (Rp/$) Assessment 1. Remain Uncovered, settling A/P in 180 days at spot rate If spot rate in 180 days is same as current spot (Rs) 3,365,464.34 2.5257 Risky If spot rate in 180 days is same as forward rate (Rs) 3,541,666.67 2.4000 Risky If spot rate in 180 days is expected spot rate (Rs) 3,269,230.77 2.6000 Risky 2. Buy Japanese yen forward 180 days Settlement amount at forward rate (Rs) 3,541,666.67 2.4000 Certain 3. Money Market Hedge 8,500,000.00 discount factor for yen investing rate for 180 days 0.9926 1/(1 + (.015 x 180/360)) 8,436,724.57 2.5257 Indian rupee, current amount (Rs) 3,340,411.26 Hindustan Lever's WACC carry-forwad factor for 180 days...
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- Fall '11
- Spot rate, Foreign exchange market, United States dollar, Forward contract, Spot price