Problem 9.

2 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, 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?

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 921,400,000