Question

4. On January 1 2010, Boeing is awarded a contract for supplying three Boeing 787 to Spainair. One Boeing 787 costs €200 Million On December 31, Boeing will receive a payment for this sale. Boeing has decided to use a Forward contract in order to manage its transaction exposure. Assume 1€ = 1$ on January 1. Price agreed in the forward contract is 0.9$/€. Spot exchange rate scenarios (12-31-2010) 1 € = 1$ 1€ = 0.9$ 1€ = 1.20$ 1€ = 0.8$ a) Could you complete the next table? $ Value of Original Receivable (million S) Gain & Loss Money on Forward Contract (millions $) TOTAL CASH FLOW (millions) Spot exchange rate scenarios (12-31-2010) 1€ = 1$ 1 € = 0.90$ 1 € = 1.20$ 1€ = 0.80$ b) If Boeing decides to manage the transaction exposure with Money-Market hedge at which Euro interest rate should Boeing borrow Euros in order to have the same Gain&Loss figures as it has in the Forward contract for the same scenarios? (Assume $ interest rate = 6%)

Answer 1

SOL million 200 million per Boeing Total Receivable = € 600 total 3 Boeings) Forward Rate = 0.98 € Forward Contract = 0.9 x 600 Amount receivable on -$540 million a) Table $value of Receivables (million $) Rates as on 31-12-10 Total Cash blow (million ) Gain/loss on Folward contract (million 8) 1€ = 1$ -60 540 600 540 540 16=0.9$ 1€ = 1.2$ 1€ = 0.8 $ 540 720 60 540 480 6) mill Money Market Hedge Guaranteed Dollars $540 Int rate 6% so Amount to be invested = 540 = $509.643 1.06 (16= 18) By converting it in Euros = $509,43 - +509.43 Amant Receivable = €600 mill So Rate on Euro borrowings = 600 = 19.78% 5o9.43 = 17.78%