Question

Suppose Boeing Corporation exported a Boeing 787 to British Airway and billed £20 million payable in one year (i.e., Boeing has a £20 million receivable in one-year). The money market rates, foreign exchange rates, and option prices are given as follows:

The U.S. one-year interest rate: 2% per annum

The U.K. one-year interest rate: 3.5% per annum

The spot exchange rate: $1.32/£

One-year forward rate: $1.2985/£

Call option: exercise rate: $1.31, premium: $0.015/£

Put option: exercise rate: $1.31, premium: $0.02/£

Money Market Hedge: Show money market hedge strategy (i.e., through borrowing/lending) that Boeing can use to hedge this transaction exposure. Be sure to include the following.

(a)State which currency Boeing should borrow and calculate how much it should borrow.

(b) State the transactions needed to be done and the cash flows at t=0 and t=12 (i.e., today and one-year from today) by constructing a cash flow table.

Answer 1

Boeing Silly f20 million British fungo MMO (Money market operations) State Borrow from UK (D) and Shred in USSC det amout to be bossoved from Uk be x hence, 2 # 20357. £20 million Out Interest rale) 1.035 zo million 2 19.323ť mlm Converting spol. made to USA 223 million $1:32/2 - 25 544 milk) (ALA DI Anner@ Borrowry shall be done in (t uk and amount to be borrowed Cash flow table (in ffmilton Time (montre) (ash autflas Cash Deflow 19-323 € (Brorowing in pound 25-507 72% =0-510148) tantement en motor medias t 20 milim Trenieved from brisk asays Ics Scanned with Cascant 19-323 Principleprow Boring 0.677 teast 20 millim €