90-Day USD Receivable: Forward vs Money Market Hedge
Hanul Precision, a Seoul-based machinery exporter, will receive USD 2,000,000 in 90 days from a US buyer. The treasurer has these firm quotes: USD/KRW spot 1,342.50/1,343.50; 90-day forward 1,338.20/1,339.40. KRW money market rate is 3.60% p.a.; USD money market rate is 5.10% p.a. (act/360). Hanul can borrow USD at 4.20% p.a. and invest KRW at 3.60% p.a. The treasurer is considering (a) selling USD 2 million forward, (b) a money market hedge by borrowing USD today, converting at the spot bid, and investing KRW, or (c) waiting 90 days. The CFO believes the won will strengthen to 1,320 and wants to speculate. The company has no other USD exposure. Treat 90 days as 90/360 = 0.25 year.
1. Using covered interest parity, calculate the fair 90-day forward USD/KRW rate from the mid spot rate and the money market rates. Compare it with the bank's quote and explain the sign of the forward points.
Read the worked answer
Use the CIP formula:
F = S × (1 + r_KRW × 90/360) / (1 + r_USD × 90/360)
With mid spot S = (1,342.50 + 1,343.50)/2 = 1,343.00:
F = 1,343.00 × (1 + 0.036 × 0.25) / (1 + 0.051 × 0.25) = 1,343.00 × 1.009 / 1.01275 = 1,338.03
The bank's forward bid is 1,338.20 and ask is 1,339.40. A customer selling USD forward receives the bid, 1,338.20, which is about 0.17 won above the fair mid-rate-consistent with bid-ask costs, not an arbitrage.
The forward points are negative: 1,338.20 − 1,342.50 = −4.30 won on the bid side. USD is at a forward discount because the USD interest rate (5.10%) exceeds the KRW rate (3.60%). A holder of USD can earn more USD interest, so the forward market reduces the USD's KRW price to equalize returns. The discount is not a forecast of won appreciation.
2. Compare the KRW proceeds of the forward hedge and the money market hedge. Which is higher, and what risks or constraints could reverse the choice?
Read the worked answer
Forward hedge proceeds:
USD 2,000,000 × 1,338.20 = KRW 2,676,400,000
Money market hedge:
- Borrow USD today: USD 2,000,000 / (1 + 0.042 × 0.25) = USD 1,979,218
- Convert at spot bid: USD 1,979,218 × 1,342.50 = KRW 2,657,100,165
- Invest KRW for 90 days: KRW 2,657,100,165 × 1.009 = KRW 2,681,014,066
The money market hedge is higher by about KRW 4.6 million. However, it depends on Hanul actually being able to borrow USD at 4.20%-a credit spread, facility limit, or collateral requirement could make the effective USD borrowing rate higher. It also creates a USD liability on the balance sheet and requires operational steps today. The forward is a single contract, fixes the rate, and has no funding need, but it locks in the forward discount and may require a credit line or margin. Transaction costs, taxes, and accounting treatment can narrow or reverse the gap.
3. The CFO says: “The forward rate of 1,338 is below today's spot of 1,342, so hedging locks in a loss; let's wait for 1,320.” Evaluate this reasoning.
Read the worked answer
The comparison with today's spot is misleading. The forward rate is a price that embeds the interest-rate differential, not a prediction. Because USD rates are higher, USD naturally trades at a forward discount; the “lost” 4–5 won is offset economically by the higher USD carry or by the cost of borrowing USD in a money market hedge.
Waiting is speculation. If the won strengthens to 1,320, unhedged proceeds would be USD 2,000,000 × 1,320 = KRW 2,640,000,000-lower than the forward's KRW 2,676,400,000. If the won weakens to 1,380, unhedged proceeds would be higher, but that is a bet, not a hedge. The company should compare the forward to its budget rate and risk tolerance, not to spot. A partial hedge or a collar could retain some upside while limiting downside, but the CFO's view should be documented as a deliberate position if the company chooses to leave exposure open.