Question
A Korean business person has 1 million Korean Won (KRW) to invest. There are two options, to invest in a Korean security with a return
A Korean business person has 1 million Korean Won (KRW) to invest. There are two options, to invest in a Korean security with a return of 4% a year, or to invest in a comparable German security with a return of 6.5% a year. The current spot exchange rate is 1,300 (KRW/EUR). 1) Suppose the 1-year forward rate is 1,250 (KRW/EUR). If there are no transaction costs and the investor will secure a forward contract with the bank to sell Euros after a year when taking the second option, which option would the investor choose? And how much return would the investor earn after a year?
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