Problem
In the context of 'Vision 2027', the new management is considering building a new factory in South Korea. The Korean subsidiary will require an initial investment of 160,000m South Korean Won (KRW). Jasmine can borrow money to finance this investment in the UK market, in France, or in South Korea. Table 5 offers information about the borrowing costs in different currencies and an estimation of the future value of FX. Discuss the foreign exchange risk associated with this expansion plan and advise which is the best way to finance the Korean factory.
|
Initial investment (KRW)
|
160,000
|
|
Interest rate in UK (5-year loan)
|
8% per annum
|
|
Interest rate in South Korea (5-year loan)
|
16% per annum
|
|
Interest rate in France (5-year loan)
|
10% per annum
|
|
Spot exchange rate: KRW per GBP
|
1,600.00
|
|
Expected appreciation of GBP in relation to KRW
|
5% per annum
|
|
Spot exchange rate: EUR per GBP
|
1.20
|
|
Expected appreciation of GBP in relation to EUR
|
3% per annum
|