KAL and Boeing.Korean Airlines (KAL) has just signed a contract with Boeing to purchase two new 747-400s for a total of USD, with payment in two equal tranches. The first tranche of USD has just been paid. The next is due three months from today. KAL currently has excess cash of Korean won (KRW) in a Seoul bank, and it is from these funds that KAL plans to make its next payment. The current spot rate is KRWUSD1.00, and permission has been obtained for a forward rate (90 days), USD1.00. The 90-day Eurodollar interest rate is %, while the 90-day Korean won deposit rate (there is no Euro-won rate) is %. KAL can borrow in Korea at %, and can probably borrow in the U.S. dollar market at . A three-month call option on dollars in the over-the-counter market, for a strike price of KRWUSD1.00 sells at a premium of , payable at the time the option is purchased. A 90-day put option on dollars, also at a strike price of USD1.00, sells at a premium of % (assuming a 12% volatility). KAL's foreign exchange advisory service forecasts the spot rate in three months to be KRWUSD1.00. Assume a 360-day financial year. Compare alternate ways below that KAL might deal with its foreign exchange exposure.

a. How much in Korean won will KAL pay in 90 days without a hedge if the spot rate in 90 days is the same as the expected spot rate of KRWUSD1.00?

b. How much in Korean won will KAL pay in 90 days with a forward market hedge?

c. How much in Korean won will KAL pay in 90 days with a money market hedge?

d. How much in Korean won will KAL pay in 90 days with an option hedge if the expected spot rate in 90 days is assumed to be greater than KRWUSD1.00?

e. 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 three-month period?