Kristo Asafo Tools Ltd., is filling an order from a Korean industrial company for machinery worth 160,000,000 Won. The export sale is denominated in Korean Won and is on a one-year open account basis. The opportunity cost of funds for Kristo Asafo Tools Ltd is 8%.

The current spot rate between Won and dollars is 800 Won/$. The forward Won sells at a discount of 12% per annum, but the finance staff of Kristo asafo Tools believes that the Won will drop 9% in value over the next year. Kristo Asafo Tools Ltd faces the following choices:

This question compares the cost of a money market hedge with a forward hedge and considers both alternatives against the possibility of remaining unhedged.

1. Wait one year and receive the Won amount and exchange Won for dollars at that time. 3marks
2. Sell the Won proceeds of the sale forward today. 3marks
3. Borrow Won from a Seoul band at 20% per annum against the expected future receipt of the Korean importer’s payment. 3marks
4. What do you recommend and why? 6marks

Answer rating: 100% (QA)

a Unhedged Cash Flow Won Amount Future Spot rate Unhedged Cash Flow 160... View the full answer