Economic rationale japan airlines behind hedges

Reference no: EM13116905

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?

Reference no: EM13116905

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