SUPPOSE THAT BOEING CORPORATION EXPORTED A BOEING 747 TO BRITISH AIRWAYS AND BILLED GBP 10 MILLION PAYABLE IN ONE YEAR. THE MONEY MARKET INTEREST RATES AND FOREIGN EXCHANGE RATES ARE GIVEN AS FOLLOWS:

US INTEREST RATE: 6.10% PER ANNUM

UK INTEREST RATE: 9.00% PER ANNUM

SPOT EXCHANGE RATE: US$1.50/GBP

FORWARD EXCHANGE RATE: US$1.46/GBP (1-YEAR MATURITY)

ASSUME THAT BOEING SELLS A CURRENCY FORWARD CONTRACT OF GBP10 MILLION FOR DELIVERY IN ONE YEAR IN EXCHANGE FOR A GIVEN AMOUNT OF US DOLLARS. SUPPOSE THAT ON THE MATURITY DATE OF THE FORWARD CONTRACT, THE SPOT RATE TURNS OUT TO BE US$1.40/GBP. WHICH OF THE FOLLOWING IS TRUE?

Select one:

a.

BOEING LOST US$0.6 MILLION FROM FORWARD HEDGING.

b.

NONE OF THESE.

c.

BOEING WOULD HAVE RECEIVED US$14 MILLION, RATHER THAN US$14.6 MILLION, HAD IT ENTERED INTO THE FORWARD CONTRACT.

d.

BOEING GAINED US$0.6 MILLION FROM FORWARD HEDGING.