Question 3 Based on the information given in Appendix Q3 1, answer the following questions a In the context of Vision 2027, the new management is considering building a new factory in South Korea The Korean subsidiary will require an initial investment of 160,000m South Korean Won (KRW) Jasmine can borrow money to finance this investment in the UK market, in France, or in South Korea Table 5 offers information about the borrowing costs in different currencies and an estimation of the future value of FX Discuss the foreign exchange risk associated with this expansion plan and advise which is the best way to finance the Korean factory b Mr Jordan is considering moving the Chinese factory to South Korea What are the risks that would be caused by relocating production c 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 Total question 3 25 marks 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 Question 4 Jasmine has well established export markets but if the Board approves Vision 2027, it will begin to enter new markets abroad a What options does Jasmine have to best support its new foreign operations when considering where to borrow long term funds b What finance methods might Jasmine adopt to satisfy itself that it will be paid for shipping goods to new importers

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Question 3

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

a.In the context of Vision 2027, the new management is considering building a new factory in South Korea. The Korean subsidiary will require an initial investment of 160,000m South Korean Won (KRW). Jasmine can borrow money to finance this investment in the UK market, in France, or in South Korea. Table 5 offers information about the borrowing costs in different currencies and an estimation of the future value of FX. Discuss the foreign exchange risk associated with this expansion plan and advise which is the best way to finance the Korean factory
b.Mr Jordan is considering moving the Chinese factory to South Korea. What are the risks that would be caused by relocating production?
c.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.

Total question 3: 25 marks

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

Question 4

Jasmine has well established export markets but if the Board approves Vision 2027, it will begin to enter new markets abroad.

a.What options does Jasmine have to best support its new foreign operations when considering where to borrow long-term funds?
b.What finance methods might Jasmine adopt to satisfy itself that it will be paid for shipping goods to new importers?