Question

Suppose that Boeing Corporation exported a Boeing 747 to Lufthansa and billed €10 million payable in one year. The money market interest rates and foreign exchange rates are given as follows:
The U.S. one-year interest rate: 6.10 % per annum

The euro zone one-year interest rate: 9.00 % per annum

The spot exchange rate: $ 1.50 /€

The one-year forward exchange rate $1.46/€

Assume that Boeing sells a currency forward contract of €10 million for delivery in one year, in exchange for a predetermined amount of U.S. dollars. Suppose that on the maturity date of the forward contract, the spot rate turns out to be $1.40/€ (i.e. less than the forward rate of $1.46/€). Which of the following is true?

A) Boeing gained $0.6 million from forward hedging.

B) Boeing would have received only $14.0 million, rather than $14.6 million, had it not entered into the forward contract. Additionally, Boeing gained $0.6 million from forward hedging.

C) Boeing would have received only $14.0 million, rather than $14.6 million, had it not entered into the forward contract.

D) none of the options

Answer 1

Answer: B

Explanation:

Boeing would have received only $14.0 million, rather than $14.6 million, had it not entered into the forward contract. Additionally, Boeing gained $0.6 million from forward hedging