Boeing just signed a contract to sell a Boeing 737 aircraft to Air France. Air France will be billed €20.18 million payable in one year. Th current spot exchange rate is $1.11 per euro and the one-year forward rate is $1.16 per euro. The annual interest rate is 12 percent in th United States and 11 percent in France. Boeing is concerned with the volatile exchange rate between the dollar and the euro and would like to hedge exchange exposure. Required: a. It is considering two hedging alternatives: sell the euro proceeds from the sale forward or borrow euros from Crédit Lyonnaise against the euro receivable. Which alternative would you recommend? b. Other things being equal, at what forward exchange rate would Boeing be indifferent between the two hedging methods?
Boeing just signed a contract to sell a Boeing 737 aircraft to Air France. Air France will be billed €20.18 million payable in one year. Th current spot exchange rate is $1.11 per euro and the one-year forward rate is $1.16 per euro. The annual interest rate is 12 percent in th United States and 11 percent in France. Boeing is concerned with the volatile exchange rate between the dollar and the euro and would like to hedge exchange exposure. Required: a. It is considering two hedging alternatives: sell the euro proceeds from the sale forward or borrow euros from Crédit Lyonnaise against the euro receivable. Which alternative would you recommend? b. Other things being equal, at what forward exchange rate would Boeing be indifferent between the two hedging methods?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Boeing just signed a contract to sell a Boeing 737 aircraft to Air France. Air France will be billed €20.18 million payable in one year. The
current spot exchange rate is $1.11 per euro and the one-year forward rate is $1.16 per euro. The annual interest rate is 12 percent in the
United States and 11 percent in France. Boeing is concerned with the volatile exchange rate between the dollar and the euro and
would like to hedge exchange exposure.
Required:
a. It is considering two hedging alternatives: sell the euro proceeds from the sale forward or borrow euros from Crédit Lyonnaise
against the euro receivable. Which alternative would you recommend?
b. Other things being equal, at what forward exchange rate would Boeing be indifferent between the two hedging methods?
Complete this question by entering your answers in the tabs below.
Required A Required B
It is considering two hedging alternatives: sell the euro proceeds from the sale forward or borrow euros from Crédit Lyonnaise
against the euro receivable. Which alternative would you recommend?
Note: Enter your Forward hedge and Money market hedge answers in whole dollars not in millions.
Forward hedge
Money market hedge
Recommend alternative
$
Required A
18
Required B >
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Step 1: Introduction:
VIEWStep 2: Calculate the Expected Dollar Receivable for the Forward Hedge
VIEWStep 3: Calculate the Expected Dollar Receivable for the Money Market Hedge
VIEWStep 4: Compare the Expected Dollar Receivables
VIEWStep 5: Calculate the Indifferent Forward Exchange Rate
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