The East Asiatic Company (EAC), a Danish company with subsidiaries throughout Asia, has been financing its Bangkok subsidiary primarily with US dollar debt due to the cost and availability of dollar capital against Thai baht-denominated debt (B ). The EAC-Thailand Treasurer is considering a one-year bank loan of $247,000. The current spot exchange rate is 32.03 B$/$, and interest in dollars is 6.78% for a period of one year. 1-year loans are 12.04% in baht.
a. Assuming that the expected inflation rates for next year are 4.3% and 1.24% in Thailand and the United States, respectively, at purchasing power parity, what would be the effective cost of funds in terms of thai baht?
b. If EAC's currency advisers strongly believe that the Thai government wants to drive down the value of the baht against the dollar by 5% over the next year (to promote its export competitiveness in dollar markets), what could be the effective cost of funds in baht terms?
c. If EAC could borrow Thai baht at 13% per year, would it be cheaper than part (a) or part (b) above?

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