7. Selecting a construction loan. Italthai, the Bangkok-based com- pany, has recently been awarded a baht (THB) 2,500 mlion contract for the project is to be completed six renovation of Phuket International Airport. The p 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 alterna tive short-term financing options: i. A 180-day commercial paper issue at an annual rate of 9 percent denomi- nated in baht with a letter of credit guarantee opened by Siam Commercial Bank at the cost of Vis 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--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 USS1 b. What are the risks involved in borrowing curo-dollars? What are the risks involved in lending to Italthai from Standard Chartered Bank's point of view? Hint: The THB 2,500 million contract award is the revenue that Italthai will collect in six months