South Korea’s Korean Air Lines (KAL) is the world’s 12th largest passenger airline and its second-largest cargo carrier. It has borrowed $5 billion (much of it denominated in dollars) to finance its fleet of planes.

a. In what ways is KAL affected by depreciation of the won against the dollar?

b. How can KAL use financing to reduce its currency risk?

c. KAL argues that its jet fleet naturally hedges its currency exposure. Do you agree or disagree? Explain.

d. At the end of 1997, KAL decided to sell off its older planes, use the proceeds to pay down some of its debt, and replace the sold planes with aircraft it leases through a subsidiary in Ireland. Will this strategy lower KAL’s high debt ratio?