Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Korean Airlines (KAL) has just signed a contract with Boeing to purchase two new 747-400's for a total of $76,000,000, with payment in two equal

Korean Airlines (KAL) has just signed a contract with Boeing to purchase two new 747-400's for a total of $76,000,000, with payment in two equal tranches. The first tranche of $38,000,000 has just been paid. The next $38,000,000 is due three months from today. KAL currently has excess cash of 31,000,000,000 won in a Seoul bank, and it is from these funds that KAL plans to make its next payment. The current spot rate is Won794/$, and permission has been obtained for a forward rate (90 days), Won790/$. The 90-day Eurodollar interest rate is 5.750%, while the 90-day Korean won deposit rate (there is noEuro-won rate) is 4.500%. KAL can borrow in Korea at 6.375%, and can probably borrow in the U.S. dollar market at 9.875%. A three-month call option on dollars in the over-the-counter market, for a strike price of Won784/$ 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 Won784/$, sells at a premium of 1.9%. KAL's foreign exchange advisory service forecasts the spot rate in three months to be Won787/$. 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 Won787/$?

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 Won784/$?

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?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Intermediate Financial Management

Authors: Eugene F Brigham, Phillip R Daves

9th Edition

032431986X, 9780324319866

More Books

Students also viewed these Finance questions

Question

What is a process and process table?

Answered: 1 week ago

Question

What is Industrial Economics and Theory of Firm?

Answered: 1 week ago

Question

What is the meaning and definition of E-Business?

Answered: 1 week ago

Question

What impediments deal with regulators?

Answered: 1 week ago

Question

What are their performance levels?

Answered: 1 week ago