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 The current spot rate is won 800/S, and permission has been obtained for a forward rate (90 days), won 794/S. The 90 day Eurodollar interest rate is 6.000%, while the 90 day Korean won deposit rate (there is no Euro-won 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 over-the-counter market, for a strike price of won 790/S 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 won 790/S, sells at a premium of 1.9% (assuming a 12% volatility). KAL's foreign exchange advisory service forecasts the spot rate in three 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? Make a recommendation and defend it. Uncovered Forward Cover Money Market Call Option Payment (exposure) Effective ending rate (Won/S) Current spot rate (Won/S) Option premium (call) Eurodollar interest US dollar interest borrow Korean won interest Uncovered Forward Cover Money Market Call Option Bank Balance Beginning balance Initial deductions balance for interest Interest earnings Balance at day 89 Settlement of payment Final Balance Total cost 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 The current spot rate is won 800/S, and permission has been obtained for a forward rate (90 days), won 794/S. The 90 day Eurodollar interest rate is 6.000%, while the 90 day Korean won deposit rate (there is no Euro-won 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 over-the-counter market, for a strike price of won 790/S 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 won 790/S, sells at a premium of 1.9% (assuming a 12% volatility). KAL's foreign exchange advisory service forecasts the spot rate in three 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? Make a recommendation and defend it. Uncovered Forward Cover Money Market Call Option Payment (exposure) Effective ending rate (Won/S) Current spot rate (Won/S) Option premium (call) Eurodollar interest US dollar interest borrow Korean won interest Uncovered Forward Cover Money Market Call Option Bank Balance Beginning balance Initial deductions balance for interest Interest earnings Balance at day 89 Settlement of payment Final Balance Total cost