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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.
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 per euro and the one-year forward rate is $1.10 per euro. The annual interest rate is 6 percent in the United States and 5 percent in France. Boeing is concerned with the volatile exchange rate between the dollar and the euro and would like to hedge exchange exposure.
Required:
- It is considering two hedging alternatives: sell the euro proceeds from the sale forward or borrow euros from Crdit Lyonnaise against the euro receivable. Which alternative would you recommend?
- Other things being equal, at what forward exchange rate would Boeing be indifferent between the two hedging methods?
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