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Korean Airlines ( KAL ) has just signed a contract with Boeing to purchase two new 7 4 7 - 4 0 0 s for
Korean Airlines KAL has just signed a contract with Boeing to purchase two new s for a total of USD with payment in two equal tranches. The first tranche of USD has just been paid. The next USD 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 KRWUSD and permission has been obtained for a forward rate days KRW USD The day Eurodollar interest rate is while the day Korean won deposit rate there is no Eurowon rate is KAL can borrow in Korea at and can probably borrow in the US dollar market at
A threemonth call option on dollars in the overthecounter market, for a strike price of KRWUSD sells at a premium of payable at the time the option is purchased. A day put option on dollars, also at a strike price of KRW USD sells at a premium of assuming a volatility KAL's foreign exchange advisory service forecasts the spot rate in three months to be KRWUSD Assume a 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 days without a hedge if the spot rate in days is the same as the expected spot rate of KRWUSD
b How much in Korean won will KAL pay in days with a forward market hedge?
c How much in Korean won will KAL pay in days with a money market hedge?
d How much in Korean won will KAL pay in days with an option hedge if the expected spot rate in days is assumed to be greater than KRWUSD
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 threemonth period?
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