As the new CFO for a Korean bank (rated by Standard & Poors as a single A) you have chosen to issue US$100 million of fixed rate Eurobonds that will be used to provide finance for a subsidiary bank that you have established in Vietnam (Vietnam sovereign rating is BB-). The Vietnamese dong is currently quoted spot at 23,200 to 1US$, the Thai baht is quoted spot at 32.00 to 1US$ and the Korean won is 1145 to 1US$ in the spot market. The correlation baht to dong is 0.80; the correlation dong to won is 0.50; and the correlation baht to won is 0.60. The Vietnamese loans (in dong) are all expected to be made on a floating rate basis.

(a) What foreign exchange risk management issues are you confronting and how can you overcome them? Please explain (250 words maximum).

(b) What foreign exchange risk management products could you use to hedge your position?Please explain (250 words maximum.

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