2.

Assume your company has a contract to purchase 100 computers from a Korean company. The payment is due on receipt of the shipment and must be delivered in Korea on 1 December 2018. On 1 July 2018, when you are arranging the contract, the computers are priced at 500,000 won each. On 1 July 2018, the spot exchange rate is AU$1 in exchange for 1,250 won (KRW). Assume that the 6-month interest rate in 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 2018) of one unit of Korean currency (rounding to 4 decimal places).

(B)What is the total price of the computers in Australian dollars on 1 July 2018 (rounding to 2 decimal places)?

(C)Calculate the 6-month forward exchange rate,FKRW/$, under the covered interest parity (rounding to 2 decimal places). Note that the forward rate is defined as the Korean won per AU$1.

(D) What would you advise your firm to do to avoid a loss on the deal if the Korean won costs 5% more compared to the Australian dollar (the expected depreciation rate of Australian dollar against Korean won is 5%) when payment is due on 1 December 2018? The answer should have the exact numbers (rounding up to 2 decimal places) that you would tell your CEO.

Hint:You want to get rid of the exchange rate risks.