Selecting a construction loan. Italthai, the Bangkok-based construction company, has recently been awarded a baht (THB) 2,500 million contract for the renovation of Phuket International Airport. The project is to be completed six months hence on October 1, 1996, with payment in full due upon completion and guaranteed by the Thailand Airport Authority. Italthai is seeking to raise a construction loan collateralized by the contract and is considering two alternative short-term financing options:

i. A 180-day commercial paper issue at an annual rate of 9 percent denominated in baht with a letter of credit guarantee opened by Siam Commercial Bank at the cost of 1∕16 of 1 percent.

ii. A euro-dollar loan sourced from Standard Chartered Bank’s Singapore branch carrying a semiannual rate of 3. 25 percent.

a. Which financing option do you recommend to Italthai? The spot exchange rate is THB 25 = $1. The U.S. dollar is at a 1. 75 percent annual premium vis-à-vis the baht, which is otherwise pegged to a basket of currencies, primarily U.S. dollars. The baht has been stable against the U.S. dollar, trading within a narrow range of THB 24–26 to US$1.

b. What are the risks involved in borrowing euro-dollars? What are the risks involved in lending to Italthai from Standard Chartered Bank’s point of view?

The THB 2,500 million contract award is the revenue that Italthai will collect in six months.