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Seo-jun Pak is the CEO of the Nakdong Foundation (“the Foundation”), an organization located in Busan, South Korea, whose mission is to support rural healthcare initiatives. The Foundation has a KRW220 billion portfolio consisting entirely of actively managed South Korean equities. The portfolio manager, Ha-eun Kang, has an excellent 14-year track record of beating the KOSPI 200, an index of the 200 largest firms traded on the Korea Exchange. She is permitted to use derivatives to control risks within the portfolio and to synthetically alter positions without trading the underlying securities, many of which are somewhat illiquid. Kang is meeting with Pak to review a forward position in the portfolio and to discuss two other positions she is considering establishing. Kang explains that six months ago she was concerned the Korean stock market was going to experience a substantial downward price movement in the near term, so she entered into a one-year forward contract to sell KRW180 million times the KOSPI 200, which was at 270.00, at a forward price of 265.07. Pak asks, “Why did you agree to sell the index at a forward price that is less than the price it was trading at that time? Stocks are generally expected to rise in value over time.” Kang responds, “Forward agreements are priced using an arbitrage model that considers the current price of the asset, the level of interest rates, any carry benefits received from owning the asset, and any carry costs associated with owning the asset. Carry benefits can include dividends or coupon payments, while carry costs can include storage, insurance, waste, or interest paid to borrow funds to purchase the asset. The forward price is the future value of the current price plus the future value of the carry costs less the future value of the carry benefits.” Pak notes the KOSPI 200 has risen to 278.50 over the last six months and asks, “How much have we lost on the KRW180 million forward position to date?” Kang responds, “I’ll calculate the loss taking into account the current six-month interest rate of 0.68% and the continuously compounded dividend yield on the KOSPI 200, which is 2.20%.” Kang tells Pak she is considering entering into a currency swap because the Foundation has a number of long-term contracts to purchase supplies and equipment for rural clinics and these contracts are priced in US dollars. She explains, “A fixed-for-fixed currency swap would help reduce the risk from fluctuating USD/KRW exchange rates by providing fixed US dollar payments in exchange for fixed Korean won payments. I’m looking at a five-year swap with annual payments. I’ve done some analysis of this swap based on current Korean and US interest rates and present value factors, which I’m providing to you in Exhibit 1.”Based on the information in Exhibit 1, the interest rate that the Foundation would receive in the proposed currency swap is closest to: A.1.32%. B.1.54%. C.2.29%. Solution Incorrect. This is the geometric average of the US interest rates. Correct. The Foundation would receive the US fixed interest rate, which is calculated as [1−𝑃𝑉𝑛,𝑈𝑆(1)][∑𝑖=1𝑛𝑃𝑉𝑖,𝑈𝑆(1)]=[1−0.9260][0.9884+0.9758+0.9623+0.9470+0.9260]=0.0744.7995=0.0154 or 1.54%. Incorrect. This is the Korean fixed rate, which the Foundation would pay, not receive.

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Seo-jun Pak is the CEO of the Nakdong Foundation (“the Foundation”), an organization located in Busan, South Korea, whose mission is to support rural healthcare initiatives. The Foundation has a KRW220 billion portfolio consisting entirely of actively managed South Korean equities. The portfolio manager, Ha-eun Kang, has an excellent 14-year track record of beating the KOSPI 200, an index of the 200 largest firms traded on the Korea Exchange. She is permitted to use derivatives to control risks within the portfolio and to synthetically alter positions without trading the underlying securities, many of which are somewhat illiquid. Kang is meeting with Pak to review a forward position in the portfolio and to discuss two other positions she is considering establishing. Kang explains that six months ago she was concerned the Korean stock market was going to experience a substantial downward price movement in the near term, so she entered into a one-year forward contract to sell KRW180 million times the KOSPI 200, which was at 270.00, at a forward price of 265.07. Pak asks, “Why did you agree to sell the index at a forward price that is less than the price it was trading at that time? Stocks are generally expected to rise in value over time.” Kang responds, “Forward agreements are priced using an arbitrage model that considers the current price of the asset, the level of interest rates, any carry benefits received from owning the asset, and any carry costs associated with owning the asset. Carry benefits can include dividends or coupon payments, while carry costs can include storage, insurance, waste, or interest paid to borrow funds to purchase the asset. The forward price is the future value of the current price plus the future value of the carry costs less the future value of the carry benefits.” Pak notes the KOSPI 200 has risen to 278.50 over the last six months and asks, “How much have we lost on the KRW180 million forward position to date?” Kang responds, “I’ll calculate the loss taking into account the current six-month interest rate of 0.68% and the continuously compounded dividend yield on the KOSPI 200, which is 2.20%.” Kang tells Pak she is considering entering into a currency swap because the Foundation has a number of long-term contracts to purchase supplies and equipment for rural clinics and these contracts are priced in US dollars. She explains, “A fixed-for-fixed currency swap would help reduce the risk from fluctuating USD/KRW exchange rates by providing fixed US dollar payments in exchange for fixed Korean won payments. I’m looking at a five-year swap with annual payments. I’ve done some analysis of this swap based on current Korean and US interest rates and present value factors, which I’m providing to you in Exhibit 1.”Based on the information in Exhibit 1, the interest rate that the Foundation would receive in the proposed currency swap is closest to: A.1.32%. B.1.54%. C.2.29%. Solution Incorrect. This is the geometric average of the US interest rates. Correct. The Foundation would receive the US fixed interest rate, which is calculated as [1−𝑃𝑉𝑛,𝑈𝑆(1)][∑𝑖=1𝑛𝑃𝑉𝑖,𝑈𝑆(1)]=[1−0.9260][0.9884+0.9758+0.9623+0.9470+0.9260]=0.0744.7995=0.0154 or 1.54%. Incorrect. This is the Korean fixed rate, which the Foundation would pay, not receive.

I have shared the content, ques and ans My doubt is that it is clearly written in the paragraph that the foundation is providing fixed USD payments which means that it receiving KRW payments. But in the question when they are asking ...

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