1. If the spot rate for the Won is 800 won equals 1 US $, and the annual interest rate onfixed rate one-year deposits of won is 9% and for US$ is 3%, what is the one-yearforward rate for one won in terms of dollars? Assuming the same interest rates, what isthe 8-month forward rate for one dollar in terms of won? Is this an indirect or a directrate? If the forward rate is an accurate predictor of exchange rates, in this case will thewon get stronger or weaker against the dollar? What does this indicate about inflationexpectations in Korea compared to the US?2. On January 3d, 2007, Daimler-Chrysler expects to ship 10,000 cars from its Hyundaiaffiliated plant in Korea to the US, which it will sell through its US dealers on 240-dayterms at $10,000 each. So Daimler-Chrysler will receive payment from its dealers onAugust 30, 2007. Assuming that Daimler-Chrysler group needs to cover its expenses inKorea and thus wants to hedge its won exposure using a forward contract with a US bankin Korea, what is the minimum amount of won they should receive on August 30th, 2007given the eight month forward rate for one US dollar in terms of won that you calculatedin problem one? What is one other way they might they hedge their won/dollar exposure?3. a) While market-based hedging instruments can be used to offset or counteruncertainties in interest rates and exchange rates as they impact the income statement,balance sheet hedges require a different approach. Assume you are the CFO of Toyotatrying to offset the balance sheet risks associated with Toyota?s $4.5 billion investment inGeorgetown Kentucky. Please explain how this risk would be offset by a combination ofa 15-year Euro Dollar Bond with equal repayments in the last five years and a floatingrate 10 year syndicated Euro-Dollar bank loan combined with an interest rate swap.Assume a fifteen-year straight-line amortization of the new Georgetown facility.b) Look at the JAL FX loss scenario in the Additional Text Readings where JAL lost asmuch or more in FX than the $800 million value of the planes it was purchasing. Thencalculate JAL?s cost if it had used a different type of hedge, borrowing US $ to buy USgovernment bonds that it then cashed as each plane was purchased. Generally one canborrow up to 95% of the value of US government bonds with the borrowing costnormally about .25% or 25 basis points above the yield on the bonds. Assume that theyield on the bonds is 8% and that they borrow for the full 10 years noted in the case.4. Look in the paper and give the direct and indirect quotes for the Euro, the JapaneseYen, the British pound, the Swiss Franc, and the Hong Kong Dollar.5.a) Microsoft, whose global sales are generally dollar denominated, finds it has excesscash of $750,000,000, which it can invest for up to three years. It has determined that itsbest options are either a three-year Euro-dollar ($) deposit paying 4.5% or a three-yearEuro denominated deposit paying 5.5% since it expects the Euro to depreciate 1% perannum against the dollar over the next three years. Using cash flow analysis, determine inwhich currency Microsoft should invest. Be sure to show your complete calculations ofthe annual return and conversion of Euro back to dollars at the end of the three-year term.Assume that the annual interest amount is reinvested, i.e. compounds, at the same annualinterest rates. Would your answer change if Microsoft revised its outlook for the Euro todepreciate 1.25% per year?b) British Oxygen whose global sales are generally dollar denominated needs to borrow$50,000,000 for working capital and intends using a 5-year multi-currency revolvingcredit. It can borrow in US$ at 8.5% p.a. or in SFr at 5.5% p.a. However, it expects theSFr to appreciate on average 4% p.a. over the next five years. Using a cash-flow analysisdetermine in which currency BOC should borrow. Would your answer change if BOCcould issue SFr commercial paper supported by the revolving credit at 3.5%?