The East Asiatic Company(EAC), a Danish company with subsidiaries throughoutAsia, has been funding its Bangkok subsidiary primarily with U.S. dollar debt because of the cost and availability of dollar capital as opposed to Thaibaht-denominated (B) debt. The treasurer ofEAC-Thailand is considering a1-year bank loan for $ 252,000. The current spot rate is B32.04/$, and thedollar-based interest is 6.74% for the1-year period.1-year loans are 11.96% in baht.

a. Assuming expected inflation rates for the coming year of 4.2% and 1.22% in Thailand and the UnitedStates, respectively, according to purchase powerparity, what would be the effective cost of funds in Thai bahtterms?

b. IfEAC's foreign exchange advisers believe strongly that the Thai government wants to push the value of the baht down against the dollar by 5% over the coming year(to promote its export competitiveness in dollarmarkets), what might be the effective cost of funds in bahtterms?

c. If EAC could borrow Thai baht at 13.00% perannum, would this be cheaper than either part a or part b?