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Supa-Low Ltd (SLL), a new low-cost airline based in Brussels, has recently been granted approval to provide commercial passenger flights between Australia and southeast Asia.

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Supa-Low Ltd (SLL), a new low-cost airline based in Brussels, has recently been granted approval to provide commercial passenger flights between Australia and southeast Asia. SLL recently signed a contract to purchase 10 mid-size Boeing aircraft at a total cost of USD 300m, payable to Boeing exactly one year forward. As it is a European company, SLL's home currency is Euro and therefore a foreign exchange risk exposure arises from this transaction. The current USD:EUR spot rate is 1.15. Due to the size of the transaction, the SLL Board has instructed the Treasurer to hedge the FX exposure using a one-year forward contract at the current price of USD:EUR 1.22. (a) Is the forward contract rate at a premium or discount to the spot rate? (b) Assuming three separate scenarios - hedge 100%, hedge 50%, unhedged - determine what will be the outcome (in Euro) if the spot rate at maturity of a forward contract is USD:EUR 1.35

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