Exchange rate effect on Costco

US Dollar (USD) versus Korean Won (KRW)

Agenda

- Identify selected currencies

- Historical data and trends

- Relative forecast

- Impact of forecast

- Recommendation

Currency

Historical data and trends

2 years 5 years

Historical data and trends

From 1981 - 2015:

- Average at 994.17 KRW per USD

- Highest at 1962.50 in Dec 1997

- Lowest at 667.20 July 1989

Volatility:- 1 month: 9.26 %- 3 months: 8.27%- 1 Year: 7.12%- 3 Years: 5.72 %

Exchange rate forecast: Purchasing Power Parity

Exchange rate: 1 USD = 1141.10 KRW

Membership US: $55

Membership Korea: 35,000 KRW =>$30.67

Exchange rate forecast: International Fisher model

Based on the real interest rate of the country:

US real interest rate: 1.8%

Korean real interest rate: 3.7%

Spot rate USD/KRW: 0.00087

Forward rate 1 year: 0.000854

Forward rate 2 year: 0.000839

Exchange rate forecast: Forward Rate Model

Based on the forward rate:

- KRW will depreciate against USD in the future.

Source: CMEgroup

Translation effect: Cost effect

Imports become more expensive

increased cost to send USD denominated products to Korea to be sold

Price increases in foreign market*

less purchasing power of KRW relative to USD

*assumption: Costco raises prices in KRW

Translation effect: Revenue side

Net cash flows are worth less when translated from KRW to USD

Assets worth less on financial statements

represent gains or losses from exchange rates

changes posted in Translation Equity Account

Competitive effect

●Costco will lose customers or profits

●Choose between revenue or quantity

Recommendation to counter the effect

Forward foreign-exchange Contract Rate

Maintain the membership price

Thank you for your attention

Souces:

- Costco 10k form 2014.

- http://www.cmegroup.com/trading/fx/emerging-market/korean-won.html