Jasmine is a large company which manufactures children's toys.It is a private UK limited company with a diversified shareholder base. The company has its headquarters in London, and as part of a group structure, wholly owns subsidiary companies in the UK, China and the US.

A new chief executive (CEO), Mr Harold Jordan, was recently appointed by the Board to replace the retiring CEO, Mr James Hannah, who led the company for the past twenty-five years. During this time, Jasmine has produced an extensive range of products for the children's toy industry. Many of the toys manufactured are protected through patents and trademarks held by the company. The manufacturing business has a small innovation team which is tasked with improving or developing products for markets. Over the last few years, however, the company's profitability has declined through a combination of factors including increasing competition and rising costs. Mr. Jordan has been tasked with reinvigorating the company, and providing growth in the business lines, ultimately improving profitability and the overall value of the company.

After undertaking a full review of the company's operations, Mr Jordan has announced a five-year strategic plan which he calls "Vision 2027". Mr Jordan has suggested that the company needs to restructure, reduce staffing, and crucially, focus on entering new markets in Europe. As part of Vision 2027, Mr Jordan plans to introduce new environmentally friendly technology to manufacture drones and robots for the toy market; to develop a series of family orientated toys to encourage family bonding; and produce a new range of educational toys. Vision 2027 will require new manufacturing plants to be opened up, and because of Brexit, Mr Jordan is thinking of moving the company's headquarters to Paris. He has yet to discuss these plans with the Board, and although he knows he has been hired to provide a new direction for the company, he recognises that Vision 2027 will raise several concerns with his senior colleagues. Supporting financial and operational information appears in the Appendices.

Question 3

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

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

2. 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. (15 marks)
4. Mr Jordan is considering moving the Chinese factory to South Korea. What are the risks that would be caused by relocating production? (5 marks)
6. 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. (5 marks)

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To address the questions provided youll need to analyze the foreign exchange risks associated with the expansion plan discuss the risks of relocating ... View the full answer