Korean Airlines. Korean Airlines (KAL) has just signed a contract with Boeing to purchase two new 747-400’s for a total of $60,000,000, with payment in two equal tranches. The first tranche of $30,000,000 has just been paid. The next $30,000,000 is due three months from today. KAL currently has excess cash of 25,000,000,000 won in a Seoul bank, and it is from these funds that KAL plans to make its next payment.

The current spot rate is W800/$, and permission has been obtained for a forward rate (90 days), W794/$. The 90-day eurodollar interest rate is 6.000%, while the 90-day Korean won deposit rate (there is no eurowon rate) is 5.000%. KAL can borrow in Korea at 6.250%, and can probably borrow in the U.S. dollar market at 9.375%.

A three-month call option on dollars in the overthe-

counter market, for a strike price of W790/$ sells at a premium of 2.9%, payable at the time the option is purchased. A 90-day put option on dollars, also at a strike price of W790/$, sells at a premium of 1.9%

(assuming a 12% volatility). KAL’s foreign exchange advisory service forecasts the spot rate in three months to be W792/$.

How should KAL plan to make the payment to Boeing if KAL’s goal is to maximize the amount of won cash left in the bank at the end of the 3-month period? Make a recommendation and defend it.