section A and B

Section A: Boeing & JAL - Initial Analysis Japanese Airlines (JAL) wants to add one Boeing 787 to its fleet in January 2021. The current purchase price as provided by BA is $100M. JAL has the option to either purchase the aircraft or lease it. JAL is evaluating both the options, and needs your help 1. If JAL were to purchase the aircraft, it can borrow up to 70% of the value at Libor + 3%. Please calculate first year interest payment, assuming Libor is 2% -- 5pts 2. What will be JALs initial cash outlay? 5pts 3. Since, the borrowing is planned for January 2021, what are some of the instruments, which JAL can use to fix its borrowing rate today? 10 pts 4. BA is also offering a monthly lease option at a lease rate factor (LRF) of 0.7%, and a tenor of 12 years. Please calculate the monthly lease payments (Lease payments = LRF*Purchase Price) 5pts

Section B: Boeing & JAL - Rate Locks For the purchase option, an Investment Bank offered JAL the following rate lock strategy. JAL can enter into a forward contract with the bank, where if Libor in January 2021 ends up higher than 2%, then the bank pays JAL the difference on $100M notional. The case will be reversed if Libor ends up lower than 2%. 1. If Libor is 2.5% in January 2021, how much does JAL receive or pay to the investment bank in the first year? 5pts 2. Continuing with 1 above, how much interest will JAL pay on its loan in the first year? 10 pts 3. What kind of an instrument is this? 5pts For the lease option, the investment bank has offered to pay $80/bp for each basis point change in 7-year swap in January 2021 vs. now. From Part A, remember that BAs lease offer has $100/bp sensitivity to the 7-year swapthis $20/bp difference can be understood as risk compensation 4. If the 7-year swap in January 2021 is 3%, how much does JAL receive or pay to the investment bank? 10 pts 5. Continuing with 4 above, what will be the monthly lease payments made to BA? 10 pts 6. What is JALs net loss/gain on this deal? 5 pts 7. What kind of an instrument is this? -- 5 pts