Suppose you work for Citicorp South Korea. A local bank wanted to buy USD50,000,

Question

Suppose you work for Citicorp South Korea. A local bank wanted to buy USD50,000,000 one month forward. Since you think Korea is a risky environment you need to built 2% margin (monthly) in your forward price to account for risk. Current spot and one month interest rates in USD and Korean Won are as follows. What would be your forward quote?

Bid Offer
Spot rate, USD/KRW or KRW per $ 685 700
USD Interest Rate(per annum) 7.50% 8.50%
Korean Interest Rate(per annum) 35.00% 45.00%

736

722

913.5

none of the above

736

722

913.5

none of the above

Explanation / Answer

One month forward quote = {700 * [(1 + 45%/12) / (1 + 8.5%/12)]} * 102% = $736

Thus answer is option A

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