Question

4 pts Question 2 Boeing just signeda contract to sell a Boeing 737 aircraft to Air France. Air France will be billed €50 million which is payable in one year. Tbe current spot exchange rate is $1.1/€ and the one-year forward rate is $1.20/€. The annual interest rate is 5.0% in the U.S. and 2.0 % in France. Boeing is concerned with the volati le exchange rate between the dollar and the euro and would like to hedge exchange exposure. Now Boeing also considers the hedging by using the one-year put option on € with the exercise rate of $1.05/€ for the premium of $0.02 per . Assume that your expected future spot exchange rate is the same as the forward rate. What is your ranking order of the three alternatives from the most preferred to the least preferred? option market, forward market, money market. O forward market, money market, option market. O forward market, option market, money market O money market, option market, forward market.

Answer 1

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U W BOEING 787 26 MILLION File Home Insert Page Layout References Mailings Review View Find Cut T Aa Calibri (Body) 11 A A AaBbCcD AaBbCcDc AaBbC AaBbCc AaB 4aBbCc. AaBb CcD ab Replace a Copy A Paste A T Normal Change Styles BI U he x. x Subtle Em.. T No Spaci... Heading 1 Heading 2 Title Subtitle Format Painter Select Clipboard Font Paragraph Styles Editing 2- 1 X I1: 2 1. 3- 4 5 6 7 :@1: 9 I10 11 I 12 . 13 -114 :I 15 16 - 17 18 LL Hedge in forward market spot rate: $1.10 1 euro forward rate :$ 1.20 1 euro so if Boeing today enters into forward contract, it will have 1 euro =$ 1.20, So total sale proceeds $60,000,000 50,000,000 x 1.20 Hedge in options market Here we will go for put option as we are exporter The option premium payable is $0.02 So premium payable is 50,000,000 x 0.02 = $1,000,000 Now if price is below $1.05/euro, we will exercise the option otherwise not. (50,000,000 x $1.05) - $1,000,000 = $51,500,000 So in any case the minimum amount to be received English (India) E s: 1,357 | =140 % ( Pa W 01:58 EE AENG 16-06-2019

U W BOEING 787 26 MILLION File Home Insert Page Layout References Mailings Review View Find Cut T Aa Calibri (Body) 11 A A AaBbCcD AaBbCcDc AaBbC AaBbCc AaB 4aBbCc. AaBb CcD ab Replace a Copy BIUbe x, x Paste A-. A T Normal Change Styles Subtle Em.. T No Spaci... Heading 1 Heading 2 Title Subtitle Format Painter Select Clipboard Font Paragraph Styles Editing 2 1: A I1: 2 .1. 3 :1. 4- I6 7 I:81 9 110 11 I 12 13-I14 I 15I 16 - 17 18 Hedge in money market step 1 borrow euro today at 2% rate Amount of euro to be borrowed 50,000,000/ (1+0.02) 49,019,607.84 euro step 2 convert this euro to dollars today at spot rate spot rate: $1.10 1 euro Dollar received today = euro 49,019,607.84 x $1.10 = $ 53,921,568.63 step 3: invest in US @5 % After a year, amount receivable $ 53,921,568.63 (1.05) $ 56,617,647.06 step 4 $ 56,617,647.06 received without any risk So ranking: forward market, money market, options market (second option) E =140 % s: 1,368 | English (India) W 02:00 EE ENG 6-06-2019