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HW 4

Siam Cement, a Bangkok-based cement manufacturer, suffered large losses during the 1997 Asian financial crisis due to taking on massive foreign currency debt that became much more expensive to repay when the Thai currency was devalued. Specifically, Siam Cement took out a $50 million loan at 8.4% interest in June 1997 that had to be repaid one year later when the exchange rate had fallen to 42 Thai baht per dollar. This resulted in an unrealized foreign exchange loss of $921.4 million for Siam Cement on that loan.

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152 views2 pages

HW 4

Siam Cement, a Bangkok-based cement manufacturer, suffered large losses during the 1997 Asian financial crisis due to taking on massive foreign currency debt that became much more expensive to repay when the Thai currency was devalued. Specifically, Siam Cement took out a $50 million loan at 8.4% interest in June 1997 that had to be repaid one year later when the exchange rate had fallen to 42 Thai baht per dollar. This resulted in an unrealized foreign exchange loss of $921.4 million for Siam Cement on that loan.

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chocolatedoggy12
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Courtney Gilliam

3.15.2017
FIN 435
UIN: 00981224
CRN: 27697
Chapter 10 Homework (#3 & Extra Question)
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 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,
Siams 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?
50,000,000 + 4,200,000 = 54,200,000
54,200,000 * 25 = 1,355,000,000
50,000,000 * 25 = 1,250,000,000
1,355,000,000 1,250,000,000 = 105,000,000

50,000,000 + 4,200,000 = 54,200,000


54,200,000,000 * 42 = 2,276,400,000
2,276,400,000 1,355,000,000 = $921,400,000

The foreign exchange loss incurred on the transaction is $921,400,000.

Extra Question) Given the following facts, complete problems A and B below:

Spot rate - $2/

3 month Forward rate - $1.98/

3 month U.K. (U.S.) interest rate - 4% (3%) per year.

3 month put contract with a strike price of $1.99/ with a 4% premium

3 month call option with a strike price of $1.99/ with a 3.5% premium

A) How would company ABC hedge a 200 million receivable? Which alternative
would you pick?

You would need to use the money market to hedge a 200 million receivable. With
receivables, you have to borrow in foreign currency, invest loans in US money
market, and pay off loans with receivables.
Courtney Gilliam
3.15.2017
FIN 435
UIN: 00981224
CRN: 27697
B) How would company ABC hedge a 400 million payable? Which alternative would
you pick?
You would need to use the money market to hedge a 400 million payable. With
payables, you have to buy/hold the foreign currency, borrow the currency in US
money market, and pay liability.

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