1. If the spot rate for Korean Won is that 950 Won is equal to 1 US dollar, and

Question

1. If the spot rate for Korean Won is that 950 Won is equal to 1

US dollar, and the annual interest rate on fixed rate one-year

deposits of Korean Won is 3.5% and for US$ is 1.5%, what is the

nine-month forward rate for one dollar in terms of Won? Assuming

the same interest rates, what is the 18-month forward rate for one

Won in dollars? Is this an indirect or a direct rate? If the

forward rate is an accurate predictor of exchange rates, in this

case will the Won get stronger or weaker against the dollar? What

does this indicate about the market's inflation expectations in

Korea compared to the US?

2. On January 2nd, 2013, Samsung expects to ship 500,000 flat

screen TVs from its Korean plant to the US, which it will sell

through US dealers on 270-day terms at $450 each. So Samsung will

receive payment from its dealers on September 28th, 2013.

Assuming that Samsung needs to cover its expenses in Korea and

thus wants to hedge its Won/US$ exposure using a forward contract

with a Korean bank in the US, what is the minimum amount of Won

they should receive on September 28th, 2013 given the nine month

forward rate for one US dollar in terms of Won that you calculated

in problem one? What are two other ways Samsung might hedge their

Won/US$ exposure?

Please solve completely 3000 points!!!

Explanation / Answer

1)

1$ = 950 Won

Won interest rate = 3.5%

$ interest rate = 1.5

After nine months

1$ = 1+ 1$*1.5/100*9/12 = 1.01125

950 won = 950 +950* 3.5/100*9/12 = 974.9375

So after nine months $1.01125 = 974.9375 Won

9 month forward rate 1$ = 964.09 Won

Now 18 month forward rate

after 18 month

1$ = 1+ 1.5/100*18/12 = 1.0225

950 Won = 950 + 950*3.5/100*18/12 = 999.875

So 18 month rate =

$1.0225 = 999.875 Won

1$ = 977.83 Won

This is direct rate

Won will get weaker against the dollar if forward rate is accurate predictator.

This will create a market expectation in korea that inflation will go up since dollar will become more stronger.

2) Amount samsung will receive as per nine monts rate above

= 500000*450*964.09 = 216920250000 Won.

Two Other way of hedging by samsung:

a) Take 9 months loan of $ 225000000 today and convert it into Won today and keep it in deposit.After nine months it can repay the loan with $ 225000000 received from debtors.

b) Sell 9 months $225000000

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