parity? (5%) according to the relative purchasing 3. If a year later, the exchange rate turns out to be $1.20/f, the pound is undervalued or overvalued and by how much? (10%) 4. Explain the possible reasons that the actual exchange rate deviates from the theoretical exchange rate you calculated in question 2. (15%) III. Case study (20%) Mr. Lee is a Chief Financial Officer in Haier Company. The company has just signed a contract to sell refrigerator to a South Korean distributor and will receive $1 million U.S. dollars when the refrigerators arrive in Seoul in 3 months. Since Haier is a big company, it can borrow and lend in the two countries money market. Assume the U.S. dollar interest rate is 5% p.a. and the RMB interest rate is 6% p.a. Mr. Lee call his bank for the spot and 3-month forward RMB/dollar exchange rate. Right now, the spot rate is RMB 6.85/$, and the 3-month forward rate is RMB6.8550/$. 1. What kind of the foreign exchange risk exposure does the company face? (4%) 2. What can Mr. Lee do to hedge the risk exposure? (16%) IV. Bonus (15%) ernatives discussed in question 2 of the case study is better