In 1997, the Bank of Thailand was maintaining a fi xed exchange rate at 26 Thai baht to the dollar. At the same time, Thai interest rates were substantially higher than those in the United States and Japan. Thai bankers were borrowing money in Japan and lending it in Thailand.

a. Why was this transaction profi table?

b. What risks were associated with this method of fi nancing?

c. Describe the impact of a depreciation of the baht on the balance sheets of Thai banks involved in these transactions.