Question 3

Based on the information given in Appendix Q3.1, answer the following question.

The research department of a large financial institution provided inflation expectations for the next five years. According to the forecasts, UK will have 2% more inflation than France and 4% 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, exchange rates and expected appreciation of currencies

Table 5: Borrowing costs

Initial investment (KRW)	160,000
Interest rate in UK (5-year loan)	8% per annum
Interest rate in South Korea (5-year loan)	16% per annum
Interest rate in France (5-year loan)	10% per annum
Spot exchange rate: KRW per GBP	1,600.00
Expected appreciation of GBP in relation to KRW	5% per annum
Spot exchange rate: EUR per GBP	1.20
Expected appreciation of GBP in relation to EUR	3% per annum