Over the past year, Thailand has experienced an inflation rate of about 7%, in contrast to U.S. inflation of about 2.5%. At the same time, the exchange rate for the Thai baht (B) has gone from B26.1/$1 to B38.9/$1.
a. What has happened to the real value of the baht over the past year? Has it gone up or down? A little or a lot? How does this compare to the change in its nominal value?

b. What are the likely effects of the change in the baht’s real value on the dollar profits of the Thai subsidiary of a company like Coca-Cola that sells almost exclusively in the Thai market?

c. What are the likely effects of the change in the baht’s real value on the dollar profits of a textile manufacturer that exports most of its output to the U.S.?

d. Suppose that Coca-Cola took out a B130 million loan at the beginning of the year. If the interest rate on the loan was 18%, what was Coca-Cola’s real (inflation-adjusted) baht cost of borrowing baht over the past year in percentage terms?

e. Given the parameters in part d, what was Coca-Cola’s dollar cost of borrowing baht over the past year?