In the context of 'Vision 2028', the new management is considering building a new factory in South Korea. The Korean subsidiary will require an initial investment of 200,000m South Korean Won (KRW). Jasmine can borrow money to finance this investment in the UK market, in France, or in South Korea. Appendix Q3 offers information about the borrowing costs in different currencies and an estimation of the future value of FX. Advise which is the best way to finance the Korean factory. 

Appendix Q3
Initial investment (KRW)	200,000
Interest rate in UK (5-year loan)	0.09 (9%)
Interest rate in South Korea (5-year loan)	0.15 (15%)
Interest rate in France (5-year loan)	0.12 (12%)
Spot exchange rate: KRW per GBP	2,000.00
Expected appreciation of GBP in relation to KRW	4% per annum
Spot exchange rate: EUR per GBP	1.18
Expected appreciation of GBP in relation to EUR	3% per annum

Guidance:

Build a table comparing the three KRW, GBP, and EUR borrowing costs. (7 columns and 11 rows).  
Your columns will range from Year 0 to Year 5 and have a total payments column.
Set up the initial investment (in KRW) and the three interest rates (9%, 15% and 12%) in the first four rows.
In the next two rows, set up the two exchange rates, i.e. £1 = KRW?, and £1 = EUR?  Remember that both currencies are appreciating over five years.
Then, calculate the debt in KRW.  The interest calculation is simple interest in each year, and the principal sum is paid back in year 5.
Calculate the GBP debt using the KRW/GBP spot rate in the next row.  It's the same process as for KRW but with a different interest rate.
Calculate the EUR debt using the EUR/GBP spot rate in the next row.  It's the same process as for KRW but with a different interest rate.
You convert the GBP and EUR values into KRW in the last two rows.
You can now compare the total borrowing cost in each currency in KRW.
You now know the cheapest currency to borrow the required funds from the table.  Is this the best financing option?
Now explain the foreign currency risks involved in this exercise, e.g., what if the currency depreciated instead of appreciating?

 

Template:

  

				Year
	0	1	2	3	4	5	Total Payments
Initial Investment (KRW)	200,000
Korea Interest rate 15%	0.15
UK Interest rate 9%	0.09
France Interest rate 12%	0.12
£1 = KRW
£1 = EUR
KRW Debt in KRW
UK debt in GBP - using KRW/GBP Spot Rate
France debt in EUR - using EUR/GBP Spot Rate
GBP Loan into KRW
EUR Loan into KRW