Please show the working Boeing, a U.S. corporation, just signed a contract to se
ID: 2565281 • Letter: P
Question
Please show the working
Boeing, a U.S. corporation, just signed a contract to sell a Boeing 737 aircraft to Air France. Air France will be billed 20 million due in one year. The current spot exchange rate is $1.05/€ and the one-year forward rate is $1.10/€. The annual interest rate is 6.0% in the US, and 5.0% in France. Boeing is concerned with the volatile exchange rate between the dollar and the euro and would like to hedge exchange exposure. (a) It is considering two hedging alternatives: sell forward the euro proceeds from the sale or borrow euros from the Credit Lyonnaise against the euro receivable. Which alternative would you recommend? Why? 4 Marks) 5 (b) Other things being equal, at what forward exchange rate would Boeing be indifferent between the two hedging methods? (3 Marks)Explanation / Answer
in caseof forward hedge, the future dollar proceeds will be:
(20,000,000) (1.10) =$22,000,000.
in case of money market hedge, the firm has to first borrow the PV of its euro receivables, i.e.
20,000,000/1.05 = (Euro 19,047,619).
Then the firm should exchange this euro amount into dollars at the current spot rate to receive:
(Euro 19,047,619)($1.05/Euro) = $20,000,000, which can be invested at the dollar interest rate for one year to yeild:
$20,000,000(1.06) = $21,200,000. therefore, the firm can receive $800,000 more by using forward hedging.
b)
According to interest Rate Parity , F=S(1+i$) / (1+iF). Thus the "indifferent" forward rate will be:
F=1.05(1.06)/1.05 = $1.06/Euro