International Finance: Samsung's Currency Exposure and Risk Analysis

This report analyzes Samsung's currency management strategies, focusing on the fluctuations in exchange rates and associated risks within its international operations. It examines the direct and indirect quotations of key currencies like the US Dollar, UK Pound Sterling, and Canadian Dollar against the South Korean Won, along with cross-exchange rates. The report illustrates currency value changes over a year, attributing these shifts to factors such as domestic economic conditions, geopolitical events like Brexit, and trade dynamics. It also explores concepts like locational, triangular, and covered interest arbitrage, highlighting opportunities and challenges in managing currency risks. The analysis includes estimated forward premiums, purchasing power parity, and the impact of inflation on currency values, ultimately assessing the validity of the International Fisher Effect in Samsung's financial context. Desklib offers similar solved assignments and past papers for students.

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Contents
Section 1 Concepts......................................................................................................................................3
SECTION II – Exchange Rate Behaviour & Risk Management..................................................................5
Bibliography................................................................................................................................................7
Table 1 Direct Quotation for Korean Won against other currencies............................................................3
Table 2 Indirect Quotation for South Korean Won......................................................................................3
Table 3 Cross Exchange Rates for Other Currencies...................................................................................3
Table 4 Interest Rate Parity and Forward Premium.....................................................................................6
Table 5 Purchasing Power Estimates...........................................................................................................7
Table 6 Percentage Change in Currency of each Country against South Korean Won................................8
Graph 1 The South Koran Won and US Dollar exchange Rate...................................................................4
Graph 2The UK Sterling Exchange Rate against South Korean Won.........................................................4
Graph 3 Short Term Interest Rates for USA, UK and Canada since January 2016......................................5

Section 1 Concepts
a) Samsung Corporation operates in several countries and hence, must manage several currencies. Better
management of currencies provides the Company with an additional source of income. (Samcung
Electronics Co. Ltd., 2017) Samsung Electronics trades in Canadian Dollar, US dollar, Great British
Pound and Sterling . among other currencies. The exchange rates are given as below: :
Country 2016 2017
US Dollar 1191.46 1207.23
UK Pound Sterling 1751.3548 1480.0119
Canadian Dollar 0.001111 884.9558
Table 1 Direct Quotation for Korean
Table 2 Indirect Quotation for South Korean Won
Table 3 Cross Exchange Rates for Other Currencies (*noon rates Won against other currencies)
Country 2016 2017
UK Pound Sterling - US Dollar 1.2303 1.351
UK Pound Sterling – Canadian
Dollar
1.6576 1.6935
Canadian Dollar- US Dollar 1.3427 0.7971
Country 2016 2017
US Dollar 0.0083** 0.00094
UK Pound Sterling 0.001112 0.001168
Canadian Dollar US Dollar 0.001111* 0.001130
Source: (Bank of Canada, 2018) (Bank of England, 2018) (Board of Governors of the Federal Reserve
System (US), 2018) (XE Corporation, 2018)**

Graph 1: The South Koran Won and US Dollar exchange Rate
Source: (Board of Governors of the Federal Reserve System (US), 2018)
Graph 2The UK Sterling Exchange Rate against South Korean Won.
Source: (Bank of England, 2018)
The US Dollar has depreciated between the period of January 2016 and December 2017 against
the South Korean Won and so did the Sterling Pound. South Korean exports have risen during
the period and the country has a strong current account surplus. (Karungan, 2017) Additionally,
the US Dollar has depreciated overall against other countries due to the domestic environment
such as low inflation and perceptions of uncertainty. (Nelson, 2017) The British Pound Sterling,

on the other hand was weighed down due to perceptions and uncertainty over Brexit or UK’s exit
from the European Union. (Skinner, 2017) (Wallace, 2017). However, it seemed to have
recovered by the end of the year.
SECTION II – Exchange Rate Behaviour & Risk Management
a) Given below is a graph of the Interest Rates
Graph 3 Short Term Interest Rates for USA, UK and Canada since January 2016
Source (Organization for Economic Co-operation and Development, 2018)
 Locational arbitrage is possible for the Company since the Company was dealing in
several countries.
 Similarly, triangular arbitrage is possible since the more than two currencies, and a
triangulae arbitrage requires a minimum of three currencies to be held.
Covered interest arbitrage is also possible since interest rates between the three countries
have been digressing. The interest rate differential between Canada and US are the
highest. Additionally, Canada and US are major trading partners. Hence, there is plenty
of opportunity to exploit the interest rate differential and gain covered interest arbitrage.
b)

 Given Below is the estimated Forward Premium for each one of the exchange rates based
on Spot Exchange Rate on first trading day of January 2016.
Table 4 Interest Rate Parity and Forward Premium
Country
Spot Rate
Calculation
Interest Rate of
Foreign Currency
1+ Interest Rates
of Foreign
Currency
Forward Premium(1 + Interest
Rate of Home Currency/ 1+
Interest Rates of Foreign
Currency)
USA 1191.46 2.67 1.57 1.700
UK 1751.355 2.67 1.6475 1.620
Canada 848.85 2.67 1.7965 1.486
Spot Exchange Rate Source: (Bank of England, 2018) (Board of Governors of the Federal
Reserve System (US), 2018) (XE Corporation, 2018)
Inflation Data Source: (Organization for Economic Co-operation and Development, 2018)
There is no interest rate parity since there is a premium for exchange in all three countries.
 Given below is the estimated Purchasing Power Parity for Spot price on 1st January
2016
Table 5 Purchasing Power Estimates
Country Inflation Purchasing Power
Canada 2.01126
3
0.5453
USA 0.3 1.263
UK 1.37308
7
0.691
There is no Purchasing Power Parity since the purchasing power is different in each case.
Inflation Data Source: (Organization for Economic Co-operation and Development, 2018)
 Given below are estimates of the change in the foreign currency in given year for Spot
price on 1st January 2016

Table 6 Percentage Change in Currency of each Country against South Korean Won
Country % change in currency (nominal)
USA -0.411
UK -0.382
Canada -0.327
All currencies have depreciated. Hence, the International Fisher Effect hold true.
Bibliography
Bank of Canada. (2018, April 7). Daily Exchange Rates Lookup. Retrieved from Bank of Canada:
https://www.bankofcanada.ca/rates/exchange/daily-exchange-rates-lookup/?series%5B
%5D=FXUSDCAD&lookupPage=lookup_daily_exchange_rates_2017.php&startRange=2008-
04-07&rangeType=range&rangeValue=&dFrom=2017-12-29&dTo=&submit_button=Submit
Bank of England. (2018). Bank of England. Retrieved April 7, 2018, from
http://www.bankofengland.co.uk/boeapps/iadb/index.asp?
Filter=N&Travel=NIxRSx&TD=05&TM=Apr&TY=2018&into=GBP&CurrMonth=3&startDD=
06&startMM=3&startYYYY=2017&From=Rates&C=INC&G0Xtop.x=1&G0Xtop.y=1
Board of Governors of the Federal Reserve System (US). (2018). Economic Research Federal Reserve
Bank of St. Louis. Retrieved April 7, 2018, from https://fred.stlouisfed.org/series/DEXKOUS
Jones, H. (2018). Which currency will come out on top in 2018? Retrieved April 7, 2018, from
https://www.thenational.ae/business/money/which-currency-will-come-out-on-top-in-2018-
1.692468

Karungan, L. (2017). Asia's Top-Performing Currency Is Missile-Proof. Retrieved April 7, 2018, from
https://www.bloomberg.com/news/articles/2017-07-18/low-yield-is-no-problem-for-south-
korean-won-defying-the-bears
Nelson, E. (2017). "SOGGY DOLLAR" The US dollar just had its worst year in more than a decade, and
2018 will bring more of the same. Retrieved April 7, 2018, from https://qz.com/1164158/the-us-
dollar-just-had-its-worst-year-in-more-than-a-decade-and-2018-will-bring-more-of-the-same/
Organization for Economic Co-operation and Development. (2018). OECD Data. Retrieved April 7,
2018, from https://data.oecd.org/interest/short-term-interest-rates.htm
Skinner, J. (2017, November 15). No Fundamental Reason" for Pound Sterling Weakness:
Commerzbank's Leuchtmann. Retrieved 2018, from Pound Sterling Live.:
https://www.poundsterlinglive.com/gbp-live-today/7982-no-fundamental-reason-for-gbp-
weakness-says-commerzbank-as-economic-damage-from-a-hard-brexit-will-be-limited
Wallace, T. (2017, August 29). Pound almost at parity with the euro as it falls to an eight-year low amid
Pacific crisis. Retrieved from The Telegraph Business:
https://www.telegraph.co.uk/business/2017/08/29/pound-falls-eight-year-low-against-euro/
XE Corporation. (2018, April 7). XE Currency Charts: KRW to USD. Retrieved from XE Corporation
CA: https://www.xe.com/currencycharts/?from=KRW&to=USD&view=2Y