The spot rate of exchange is Won1,507/£ between Korea and the UK. The one-month forward rate is Won1,450/£. A UK company has exported goods to Korea invoiced in Won to the value of Won 1,507m on one month's credit.
To borrow in Won for one month will cost 0.5 per cent, whereas to borrow in sterling for one month will cost 0.6 per cent of the amount borrowed.
Required
a. Show how the forward market can be used to hedge.
b. Show how the money market can be used to hedge.