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

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Finance

Boeing just signed a contract to sella Boeing 737 aircraft to Air France and will receive €200 millionin six months. The current spot exchange rate is $1.2400/€ and thesix-month forward rate is $1.26000/€. Boeing can buy a six-monthput option on the Euro with an exercise price of $1.2500/€ for apremium of $0.030/€. Currently, the six-month interest rate is2.40% per annum in the United States. Boeing believes that the Eurowould likely appreciate from its current level, but would stilllike to hedge its foreign exchange exposure.

1. Explain how Boeing should do a forward hedge. Compute theguaranteed dollar proceeds from the Air France sales if Boeingdecides to hedge using a forward contract.

2. If Boeing decides to hedge using put options on the Euro,what would be the “expected” net dollar proceeds from the AirFrance sale? Assume that Boeing regards the current forwardexchange rate as an unbiased predictor of the future spot exchangerate.

3. At what future spot exchange rate do you think Boeing will beindifferent between the option hedge and forward hedge?

4. Illustrate your answers with the appropriate post-hedging net$ proceed charts, labeling your foreign exchange rates and netproceeds properly.

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