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Assume your company has a contract to purchase 100 computers from a Korean company. The payment is due on receipt of the shipment and must be delivered in Korea on 1 December 2016. On 1 July 2016, when you are arranging the contract, the computers are priced at 500,000 won each. On 1 July 2016, the spot exchange rate is AU$1 in exchange for 1,250 won (KRW). Assume that the 6-month interest rate in Korea is 3% and the rate in Australia is 5%. Assume CIP holds What would advice your firm to do to avoid a loss on the deal if the Korean won costs 5%more compared to the Australian dollar (the expected depreciation rate of Australian dollar against Korean won is 5%) when payment is due on 1 December 2016? The answer should have the exact numbers (rounding up to 2 decimal places) that you would tell your CEO. Hint: You want to get rid of the exchange rate risks.
