Question
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
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 B26.5/$ in July 1997, Siam's interest payments alone were over $900 million on its outstanding dollar debt (with an average interest rate of 7.50% on its U.S. dollar debt at that time).
Assuming Siam Cement took out $56 million in debt in June 1997 at 7.50% interest and had to repay it in one year when the spot exchange rate had stabilized at B40.0/$, what was the foreign exchange loss in Thai baht incurred on the transaction at the end of twelve months?
Show the amount of the foreign exchange loss incurred on the transaction as computed as follows:
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