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Gangnam Corporation, a South Korean conglomerate, will pay off a Japanese Yen (denoted JPY) denominated loan with a payment of JPY 120 million eight months

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Gangnam Corporation, a South Korean conglomerate, will pay off a Japanese Yen (denoted JPY) denominated loan with a payment of JPY 120 million eight months from now. The firm's banker, Kimchi Bank has quoted the following interest rates on deposits and loans in various currency denominations. The interest rates are given as continuously compounded (annual) rates valid for all maturities up to and including two years. Currency of Denomination Deposit Rate Borrowing Rate Korean Won (KRW) 5% 6% Japanese Yen (JPY) 2% 3% Costa Rican Colon (CRC) 14% 16% The following exchange rate quotes, in KRW per JPJY, have been provided by the Kimchi Bank. Quotes in KRW/JPY Bid Ask Spot Rate 7.66 7.72 8-Month Forward Rate 7.81 7.89 Kimchi has likewise provided the following option premium quotes in KRW for European options on a notional one JPY with a common exercise price of KRW 7.69 per JPY that expire 8 months from now. Premiums in KRW Bid Ask Call on 1 JPY 0.42 0.69 Put on 1 JPY 0.31 0.49 Kimchi Bank has suggested that Gangnam consider hedging its JPY exposure by employing a range forward on the JPY with an eight-month maturity. Kimchi has set the lower limit of the range to a value of KRW 7.65 per JPY.An economic consulting rm has recently assessed the volatility or sigma of the spot rate on the Japanese Yen in terms of Korean Won at 20%. 4. (20%) Employing the spot rate version of the Black-Scholes model for valuing foreign exchange options as benchmark, assess the option premium quotations provided by Kimchi Bank. Are these quotations expensive, cheap, or just right? Specify the numerical values of the model parameters you employ, e. g., the value of the \"dividend yield,\" etc. Hint: Recall that, as the Black-Scholes model assumes the absence of bid-ask spreads and gaps between borrowing and deposit rates, to apply the model you must work with the averages of these variables, i.e., the average of the bid and the ask as well as the average of the borrowing and the deposit rates. 5. (15%) Employing the forward rate version of the Black-Scholes model for valuing foreign exchange options, decide on the correct value of the upper limit of the range forward. Goal Seek is the recommended solution procedure. Confine your answer to only two significant digits. Hint: Recall that a range forward contract is a type of forward contract, which requires no up-front outlay, and that a range forward may be viewed as an option collar. 6. (15%) Gangnam's joint venture partner in Costa Rica, Electrodomsticos Costarisenses SA, is scheduled to pay back a loan to Gangnam in the amount of CRC 0.5 billion two years from now. CRC denotes the Costa Rican Colon. Kimchi has quoted the following exchange rates, given in terms of CRC per KRW. Detail the required transactions to construct a money market hedge, citing financial amounts. Based on your comparison of the outright forward rate with the synthesized forward rate, which of these forward hedges would you recommend

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