1. Suppose the exchange rate in June 2007 is equal to 8.528 won per yen. Calculate the actual return for Korean investors that speculated and invested in Japanese deposits in June 2006 ,

if assume we invest 1000 won in japan

value in yen = 125 yen

after 1 year investment value =129.69 yen

after 1 year value in yen = 129.69 yen * future rate = 1106 won

return on investment = (1106 / 1000) - 1 = 10.6 %

so, compare to answer b its higher than domestic rate 6.25%

where in b return is 6.34% that is somewhat equal to 6.25% domestic return.

1. Consider two Korean investors: one uses speculation and the other uses hedging. Based on your previous answers, which one earned a higher return (or smaller loss) on Japanese assets between June 2006 and 2007? Explain briefly why.