3. Boeing just signed a contract to sell a Boeing 737 aircraft to Air France. Air France will be billed 20 million payable in one year. The current spot exchange rate is $1.05/ and the one-year forward rate is $1.10/. The annual interest rate is 6% in the United States and 5% in France. Boeing is concerned with the volatile exchange rate between the dollar and the euro and would like to hedge exchange exposure.

A. It is considering options market hedge (buy a euro put option to hedge its euro receivable). Assume Boeing can buy a one-year put option on euro at the exercise price of $1.10 per euro for a premium of $0.012 per euro. Write down the steps of using options market hedge and list the dollar proceeds from options hedge (make a table as follow). Future spot exchange rate (ST) Exercise decision Gross dollar proceeds Option cost Net dollar proceeds $1.00/ $1.05/ $1.10/ $1.15/ $1.20/

B. At what future spot exchange rate (ST), Boeing will be indifferent between options market hedge and forward market hedge (used on Question 1)?