The East Asiatic Company (EAC), a Danish company with subsidiaries all over Asia, has been funding its Bangkok subsidiary primarily with U.S. dollar debt because of the cost and availability of dollar capital as opposed to Thai baht-denominated (B) debt. The treasuer of EAC-Thailand is considering a one-year bank loan for $250,000. The current spot rate is B32.06/$, and the dollar-based interest is 6.75% for the one year period. One year loans are 12.00% in baht.

a. Assuming expected inflation rates of 4.3% and 1.25% in Thailand and the United States, repectively, for the coming year, according to purchase power parity, what would the effective cost of funds be in Thai baht terms?

b. If EAC'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 dollar markets), what might the effective cost of funds end up being in baht terms?

c. If EAC could borrow Thai baht at 13% per annum, would this be cheaper than either part (a) or part (b) above?