a)Boeing just signed a contract to sell a Boeing 737 aircraft to Air France. Air France will be billed 20 million which is payable in 3 months' time. The following information is available to you:

Spot exchange rate

$1.2331/ - $1.2453/

3-month forward exchange rate

$1.2342/ - $1.2486/

$ interest rate

4.6% - 4.8% p.a.

interest rate

3.2% - 3.6% p.a.

Boeing is concerned with the volatile exchange rate between the dollar and the euro and would like to hedge its foreign exchange exposure. Boeing is considering two hedging alternatives: a forward hedge and a money market hedge.

i.Which alternative would you recommend and why? Clearly show your calculations.

[30 %]

ii.What is the forward rate that would make the two hedges equivalent?

[10 %]

i have solved part bi) but im not sire if its correct , for part b im a bit lost.

this is what i have done part part i)

Boeing expects this 20 million receivable in 3months time and wants to hedge this position because Boeing is exposed to the euro and with any weakening of the euro versus the dollar it will decrease the amount received in euros and thereby the earnings of the Boeing company. This possible loss is unbounded so its best to hedge it.

Therefore, we have a foreign currency receivable so we will hedge it foreign currency payable.

The receivable is something that is coming to Boeing in the future so today Boeing has nothins.

*The money market hedge implies:

Firstly, borrowing in foreign currency (here its euros) (=liability in s)

Secondly, Investing in home currency (here its US dollars) (=asset in $s)

Therefore, with money hedge strategy, Boeing will first need to borrow the present value of those 20 million in 3-months' time to invest in dollars (home currency). In other words, you need to know how much this 20 million is in present value terms cause you need to know how much you want when you go to bank. So:

So we borrow today the PV of 20,000,000 at 3.6% in 3-months time (ask rate because we are borrowing euros bank is selling euros, so we will always get higher rate). Hence, present value is:

=>20,000,000/(1+3.8% x ) = 20,000,000/(1+0.0095)= 19,811,788.01 or 19,811,788 (present value)

The equivalent amount of euros in the spot market in US dollars (home currency) using the *$1.2453/ ask rate because the bank is selling us dollars:

=>19,811,788*$1.2453/= $ 24,671,619.61 or $24,671,620

Amount receivable in US dollars after 3months using the 4.6% bid-investing rate cause we are investing in dollars Hence,

=>$24,671,619.61 x (1+4.6% x ) = $24,671,619.61 x (1+0.0115)= $24,671,619.61 x (1.0115)

=$24,955,343.24 or $24,955,343

So, the estimated receipt in 90-days under the money market hedgeis =$24,955,343.24. So this money market hedge has converted this receivable from FC (euros) to home currency (dollars)

*On the other hand if we proceed with forward hedge, we will receive/get:

=> $1.2486/ x 20,000,000 = $24,972,000 or $1.2342/ x 20,000,000 = $24,684,000 if we use bid rate at the 3-month fwd exchange rate since we are selling euros