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

Boeing just signed a contract to sell a Boeing 737 aircraft to Air France and will receive €200 million in six months. The current spot exchange rate is $1.2400/€ and the six-month forward rate is $1.26000/€. Boeing can buy a six-month put option on the Euro with an exercise price of $1.2500/€ for a premium of $0.030/€. Currently, the six-month interest rate is 2.40% per annum in the United States. Boeing believes that the Euro would likely appreciate from its current level, but would still like to hedge its foreign exchange exposure.

1. Explain how Boeing should do a forward hedge. Compute the guaranteed dollar proceeds from the Air France sales if Boeing decides 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 Air France sale? Assume that Boeing regards the current forward exchange rate as an unbiased predictor of the future spot exchange rate.

3. At what future spot exchange rate do you think Boeing will be indifferent 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 net proceeds properly.

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Expert Solution

For better understanding below given formulas used in excel

jeff jeffy answered 6 months ago
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