In the first half of 1997, the Bank of Thailand maintained a fixed exchange rate of 26 Thai baht to the U.S. dollar, but Thai interest rates were substantially higher than those in the United States and Japan. Thai bankers were borrowing money in Japan and lending it in Thailand.
a. Why was this transaction profitable?
b. What risks were associated with this method of financing?
c. Describe the impact of a depreciation of the baht on the balance sheets of Thai banks involved in these transactions.