(a) Current Information for Samsung Common Stock (005930:KS) Starting Price KRW 1,470,000 Number of Shares Purchased 15 Calculate the projected 1-year returns in USD in each combination of common stock and KRW/USD exchange rate states. Then calculate the mean return and standard devation of returns across these Samsung stock price states (In other words, take averages and standard deviation son each column assuming that each stock price state is equally likely). 1-Year Projections for Samsung Common Stock (005930:KS) Down State Price KRW 1,176,000 Neutral State Price KRW 1,470,735 Up State Price KRW 1,874,250 Samsung Stock Price State Neutral Down Up Dollar Up No Change Dollar Down Information for KRW/USD Currencies Exchange Rate (Today) Interest Rate (KRW) Interest Rate (USD) 0.00095 0.05% 0.25% Mean Return Standard Deviation (b) Calculate the no-arbitrage covered interest parity futures price of a 1-year KRW/USD foreign exchange futures contract. 1-Year Projections for KRW/USD Exchange Rate Dollar Up (Appreciation) No Change Dollar Down (Depreciation) 0.00086 0.00095 0.00107 Futures Rate (c) To protect USD based Samsung common stock returns against KRW/USD exchange rate changes, an investor can short sell the KRW/USD futures contract above. If an investor costlessly short sells 1,500,000 KRW worth of futures contracts when buying Samsung stock, calculate the total 1-year return of both Samsung common stock and the futures contract in each stock/exchange rate state. Also calculate the mean and standard deviation of returns across the exchange rate states within each stock price state. (Hint: Use the stock price at purchase in USD in the denominator and divide into a numerator which is the sum of the US dollar gain/loss using your answers in (a) along with the USD dollar gain/loss on the futures contract using your answer in (b)) Hedge Amount (KRW) KRW 1,500,000 Samsung Stock Price State Neutral Down Up Dollar Up No Change Dollar Down 0 Mean Return Standard Deviation (a) Current Information for Samsung Common Stock (005930:KS) Starting Price KRW 1,470,000 Number of Shares Purchased 15 Calculate the projected 1-year returns in USD in each combination of common stock and KRW/USD exchange rate states. Then calculate the mean return and standard devation of returns across these Samsung stock price states (In other words, take averages and standard deviation son each column assuming that each stock price state is equally likely). 1-Year Projections for Samsung Common Stock (005930:KS) Down State Price KRW 1,176,000 Neutral State Price KRW 1,470,735 Up State Price KRW 1,874,250 Samsung Stock Price State Neutral Down Up Dollar Up No Change Dollar Down Information for KRW/USD Currencies Exchange Rate (Today) Interest Rate (KRW) Interest Rate (USD) 0.00095 0.05% 0.25% Mean Return Standard Deviation (b) Calculate the no-arbitrage covered interest parity futures price of a 1-year KRW/USD foreign exchange futures contract. 1-Year Projections for KRW/USD Exchange Rate Dollar Up (Appreciation) No Change Dollar Down (Depreciation) 0.00086 0.00095 0.00107 Futures Rate (c) To protect USD based Samsung common stock returns against KRW/USD exchange rate changes, an investor can short sell the KRW/USD futures contract above. If an investor costlessly short sells 1,500,000 KRW worth of futures contracts when buying Samsung stock, calculate the total 1-year return of both Samsung common stock and the futures contract in each stock/exchange rate state. Also calculate the mean and standard deviation of returns across the exchange rate states within each stock price state. (Hint: Use the stock price at purchase in USD in the denominator and divide into a numerator which is the sum of the US dollar gain/loss using your answers in (a) along with the USD dollar gain/loss on the futures contract using your answer in (b)) Hedge Amount (KRW) KRW 1,500,000 Samsung Stock Price State Neutral Down Up Dollar Up No Change Dollar Down 0 Mean Return Standard Deviation
