• a.The new management is also considering an entirely new investment project, which involves building a new factory in South Korea. The Korean subsidiary will require an initial investment of 157,474m South Korean Won (KRW). Jasmine can borrow money to finance this investment in the UK market, in France, or in South Korea. Appendix Q3.1 offers information about the borrowing costs in different currencies and an estimation of the future value of foreign exchange. Discuss the foreign exchange risk associated with this expansion plan and advise which is the best way to finance the Korean factory.

  b.What are the risks related to a potential relocation of the Chinese factory to South Korea?

• c.The research department of a large financial institution provided inflation expectations for the next five years. According to the forecasts, the UK will have 1.5% more inflation than France and 3% higher inflation than South Korea. On the basis of this new evidence, would you reconsider your proposal with regard to financing the Korean factory? Explain your answer.

Appendix Q3.1: Borrowing costs in different currencies and an estimation of the future value of foreign currency exchange Table 5:

Borrowing costs Initial investment (KRW) 157,474

The interest rate in the UK (5-year loan) is 0.06

The interest rate in South Korea (5-year loan) is 0.14

The interest rate in France (5-year loan) is 0.08

Spot exchange rate: KRW per GBP 1,574.74

Expected appreciation of GBP in relation to KRW 4% per annum

Forecasted exchange rate: EUR per GBP 1.16

Expected appreciation of GBP in relation to EUR 2% per annum

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