Boeing just signed a contract to sell a Boeing 737 aircraft to Air France
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Boeing just signed a contract to sell a Boeing 737 aircraft to Air France

4. 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 one year. The current spot exchange rate is $1.05/€ and the one-year forward rate is $1.10/€. The annual interest rate is 6.0% in the U.S. and 5.0% 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 two hedging alternatives: sell the euro proceeds from the sale forward or borrow euros from Credit Lyonnaise against the euro receivable. Which alternative would you recommend? Why?

(b) Other things being equal, at what forward exchange rate would Boeing be indifferent between the two hedging methods?

Hint
Accounts & Financeb) Hedging techniques usually involve the use of the financial instruments called as the derivatives. Also, two of the most common derivatives are basically options and futures. So, with the derivatives, one could easily develop trading the strategies where the loss in one investment is offset by the gain in a derivative....
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