(b) Suppose the investor borrows just enough baht for the attack and the transaction cost for this borrowing is 800 million dollar. The investor sells all his baht in the foreign exchange market to buy US dollars (at the rate of 1 dollar to 24 baht). Suppose with probability 0.2 the attack is successful and the Thai government runs out of foreign reserve. If the attack is successful, then the Thai government devalues baht and the new exchange rate would be 1 dollar to 40 baht. Given this information, what is the investor's expected profit from the speculative attack (in terms of US dollar)?

(b) Suppose the investor borrows just enough baht for the attack and the transaction cost for this borrowing is 800 million dollar. The investor sells all his baht in the foreign exchange market to buy US dollars (at the rate of 1 dollar to 24 baht). Suppose with probability 0.2 the attack is successful and the Thai government runs out of foreign reserve. If the attack is successful, then the Thai government devalues baht and the new exchange rate would be 1 dollar to 40 baht. Given this information, what is the investor's expected profit from the speculative attack (in terms of US dollar)?

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter18: Long-term Debt Financing

Section: Chapter Questions

Problem 1SBD

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