Business, 19.05.2020 22:03 tleppek6245

Boeing just signed a contract to sell a Boeing 737 aircraft to Air France. Air France will be billed €20 million payable in one year. The current spot exchange rate is $1.05/€ and the one-year forward rate is $1.10/€. Interest rate is 6.0% per annum in the U. S. and 5.0% per annum in France. Boeing is concerned with the volatile exchange rate between the dollar and the Euro and would like to hedge its foreign currency exposure. It is considering two hedging alternatives: hedging with forward contract or money market instruments.

Required:
a. What is the dollar revenue if the foreign exchange risk is hedged with forward contract?
b. How to hedge the foreign exchange risk with money market instruments?
c. What is the dollar revenue if the foreign exchange risk is hedged with money market instruments?
d. Which hedging strategy is preferred?
e. Other things being equal, at what forward exchange rate would Boeing be indifferent between the two hedging methods?

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Boeing just signed a contract to sell a Boeing 737 aircraft to Air France. Air France will be billed...

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