Answered: - 1. Assume your company has a contract to purchase 100 computers

1. Assume your company has a contract to purchase 100 computers from a Korean company. The paymentis due on receipt of the shipment and must be delivered in Korea on 1 December 2016. On 1 July 2016,when you are arranging the contract, the computers are priced at 500,000 won each. On 1 July 2016, thespot exchange rate is AU$1 in exchange for 1,250 won (KRW). Assume that the 6-month interest ratein Korea is 3% and the rate in Australia is 5%. Assume that the covered interest parity holds.

(A) Calculate the Australian dollar price (on 1 July 2016) of one unit of Korean currency (rounding to4 decimal places). [5 marks]

(B) What is the total price of the computers in Australian dollars on 1 July 2016 (rounding to 2 decimalplaces)? [5 marks]

(C) Calculate the 6-month forward exchange rate, FKRW/$, under the covered interest parity (roundingto 2 decimal places). Note that the forward rate is defined as the Korean won per AU$1.Hint: Use the CIP equation. [7 marks]

(D) What would you advise your firm to do to avoid a loss on the deal if the Korean won costs 5% morecompared to the Australian dollar (the expected depreciation rate of Australian dollar againstKorean won is 5%) when payment is due on 1 December 2016? The answer should have the exactnumbers (rounding up to 2 decimal places) that you would tell your CEO.Hint: You want to get rid of the exchange rate risks. (12 marks)

 

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