Question

KAL and Boeing. Korean Airlines (KAL) has just signed a contract with Boeing to purchase two new 747-400s for a total of USD72,000,000, with payment in two equal tranches. The first tranche of USD 36,000,000 has just been paid. The next USD 36,000,000 is due three months from today. KAL currently has excess cash of 29,000,000,000 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 KRW801 = USD1.00, and permission has been obtained for a forward rate (90 days), KRW795 = USD1.00. The 90-day Eurodollar interest rate is 5.125%, while the 90 -day Korean won deposit rate (there is no Euro-won rate) is 4.125%.

Answer 1

Korean Airlines (KAL) has signed a contract with Boeing to purchase new aircraft. KAL plans to use its excess cash in Korean won to make the next payment. The spot rate and forward rate are given for the currency conversion.

Step-by-step explanation:

The student is asking about a transaction involving Korean Airlines (KAL) and Boeing. KAL has signed a contract with Boeing to purchase two new 747-400s for a total of USD72,000,000, with payment in two equal tranches. The first tranche of USD36,000,000 has been paid, and the next USD36,000,000 is due three months from today. KAL plans to make the next payment using its excess cash of 29,000,000,000 Korean won (KRW) in a Seoul bank. The spot rate is KRW801 = USD1.00, and the forward rate (90 days) is KRW795 = USD1.00.

Here's an example calculation: If KAL wants to convert KRW36,000,000,000 to USD, they would divide it by the spot rate: KRW36,000,000,000 / KRW801 = USD44,944,319.60.

The 90-day Eurodollar interest rate is 5.125%, and the 90-day Korean won deposit rate is 4.125%. However, it is not clear how these interest rates are relevant to the transaction.