Question

Boeing, a U.S. firm, manufactures a 747 jet at a cost of $1.5 million and sells it to Lufthansa, a German airline, for €1.0 million in March. The payment from Lufthansa is due three months later, in June. The spot rate is $1.564/€; the 3-month forward rate is $1.554/€. (10 points) Suppose Boeing takes an unhedged position. 1. a) At what spot rate in June willl Boeing make zero profit (in $)? Show calculations. b) Compute Boeing's profit (in $) for various possible June spot rates in the table below. June spot rate Profit $/€ $ 1.40 1.50 1.554 1.60 1.70

Answer 1

a]

Profit = Amount received in $ - cost in $.

Amount received in $ = €1,000,000 * spot rate after 3 months.

Profit = Amount received in $ - cost.

$0 = (€1,000,000 * spot rate after 3 months) - $1,500,000.

spot rate after 3 months = $1.500/€

b]

Profit = (€1,000,000 * spot rate after 3 months) - cost in $.

A B C Profit (100,000) June Spot Amount rate $/€ received in $ Cost in $ 1.400 1,400,000 1,500,000 1.500 1,500,000 1,500,000 1.554 1,554,000 1,500,000 1.554 1,554,000 1,500,000 1.600 1,600,000 1,500,000 1.700 1,700,000 1,500,000 54,000 54,000 100,000 200,000 27

А с June Spot 21 rate $/€ 22 1.4 23 1.5 24 1.554 25 1.554 26 1.6 27 1.7 Amount received in $ =1000000*A22 =1000000* A23 =1000000*A24 =1000000* A25 =1000000*A26 =1000000*A27 Cost in $ 1500000 1500000 1500000 1500000 1500000 1500000 Profit =B22-C22 =B23-C23 =B24-C24 =B25-C25 =B26-C26 =B27-C27