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International Finance

13. In 1985, Japan Airlines (JAL) bought $3 billion of foreign exchange contracts at ¥180/$1 over 11 years to hedge its purchases of U.S. aircraft. By 1994, with the yen at about ¥100/$1, JAL had incurred more than $1 billion in cumulative foreign exchange losses on that deal.

a. What was the economic rationale behind JAL's hedges?

b. Did JAL's forward contracts constitute an economic hedge? That is, is it likely that JAL's losses on its forward contracts were offset by currency gains on its operations?

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a. What was the economic rationale behind JAL's hedges?

ANSWER. Most likely, JAL had signed contracts to take delivery of planes in the future and was using forward contracts to protect itself against a rise in the value of the dollar that would increase the yen cost of buying the planes. Alternatively, the forward contracts could have been used to hedge purchases of U.S. planes financed by borrowing dollars.

b. Did JAL's forward ...

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