Future Exchange Rate of South Korean Won

Topics: Foreign exchange market, Exchange rate, Inflation Pages: 14 (5213 words) Published: March 19, 2013
South Korean Won

Rochester Institute of Technology
Mohamed Waheed-

Table of Contents
History of Korean Won2
Macroeconomic Conditions3
Gross Domestic Production3
Major Trading Partners4
Foreign Exchange Reserve and Current Account Surplus4
Budget deficit4
Inflation and Unemployment5
Interest Rate5
Type of Currency Regime5
Current Exchange Rate6
Purchasing Power Parity and Law of One Price6
Relative Purchasing Power Parity7
Interest Rate Parity and Fisher Effects7
Forward Exchange Rates7
Balance of Payment Approach8
Current Account Balance8
Financial Account8
Basic Balance8
Official Reserve Account8
Assets Approach9
Real Interest Rate9
Prospects of Economic Growth9
Market Liquidity and Political Stability9
Yen- Biggest Competitor of the Korean Won10
Evaluation of PPP, IRP, Balance of Payment and Assets Approaches10 PPP and IRP10
Balance of Payment11
Monetary Approach12
Opinion and Forecast12
US Customer Buying a Ship from South Korea13
US Customer Selling at South Korea13
Covered Interest Arbitrage14

South Korea is an independent nation located east of China. Its neighbors are Japan, China, and North Korea. It covers an area of 100,000 square kilometers and has a population of 51 million. The capital is Seoul, with a population of 9.9 million. From 1910 to 1950, Korea was under the influence of various military powers. During this time and the years that followed, the South Korean economy grew significantly and the country was transformed into a major economy. Along with economic growth, South Korean turned into a civilian society with many of the institutions normally found in developed countries.  According to CIA’s The World Fact book, South Korea is Asia's fourth largest economy and the world’s 15th (1). The won, the South Korean official currency is, no doubt, the heart of South Korean trade and commerce. In one way, the Won is more than a medium of exchange and store of value. It is a tool used by the Korean authorities to keep South Korean goods and services competitive in the world markets. Economists and politicians often criticize the emerging nations, such as South Korea, for keeping their currency undervalued to gain competitive advantages in international trade. The objective of this paper is to evaluate the South Korean won in the light of macroeconomic factors and other economic variables, such as parity conditions, balance of payment and assets approach to determine its fair value. In addition, this paper will forecast future movement of exchange rate of the Won based on analysis and comparison of macroeconomic variables of the major trading partners, such as the United States. History of Korean Won

South Korea uses Won as official currency. According to the Bank of Korea, the first currency used in Korea was called the Mun, which was used from 1633 to 1892. Mun was replaced by Yang in 1892. The first Won was introduced in 1902 by replacing Yang. In 1910, a new currency called Yen was introduced and it was used until 1945. Won was again reintroduced in 1945 and remained in circulation until it was replaced in 1953 by Hwan. The modern day won was introduced in 1962 and initially pegged to US dollar at 125 won per $1 USD. The Won was badly hit during the Asian financial crisis as indicated in the above chart. Exchange rate went skyrocket high to near 2000 won per USD during the period between 1997 and 1998. During the crisis, there was a series of devaluations in many of the south East Asian countries. Countries such as Japan and Singapore devalued their currency to remain competitive in export markets (see chart 6, 7). Today, According to Siddiqui, a reporter at Forexmagnates, the Korean won is the 11th most actively trading currency. It accounts for more than $20 billion worth of USD daily trade volume, which is around 1.5% of...
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