Suppose that a steelmaker, has agreed to buy 1 million tons of iron ore from an Australian
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Question:
Suppose that a steelmaker, has agreed to buy 1 million tons of iron ore from an Australian mining firm at a price of $200 million. The agreement was reached on March 16, 2020, and the settlement will take place on June 16, 2020. Suppose that on March 16, 2020, the won-dollar spot exchange rate was 1000/$ and the three-month forward rate was 1010/$. Suppose that on June 16, 2020, the won-dollar spot exchange rate is 1020/$ and the three-month forward rate is 1030/$. Calculate the value of $200 million in Korean won on June 16, 2020, under the following scenarios:
(1) not hedge;
(2) hedge 50 percent of the foreign exchange risk exposure;
(3) hedge 100 percent of the foreign exchange risk exposure.
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