3) Suppose Boeing Corporation exported a Boeing 787 to British Airway and billed

Question

3) Suppose Boeing Corporation exported a Boeing 787 to British Airway and billed £15 million payable in one year (i.e., Boeing has a £15 million receivable in one-year). The money market rates, foreign exchange rates, and option prices are given as follows:

The U.S. one-year interest rate: 2.8% per annum The U.K. one-year interest rate: 2.5% per annum The spot exchange rate: $1.55/£

Show the money market hedge strategy (i.e., through borrowing/lending) that the company can use to hedge the company’s transaction exposure. Be sure to include the following.

(1) State which currency Boeing should borrow and which to invest.
(2) Calculate how much Boeing should borrow or invest.
(3) State the transactions needed to be done and the cash flows at t=0 and t=1

(i.e., today and one-year from today) by constructing a cash flow table.

Explanation / Answer

3) Suppose Boeing Corporation exported a Boeing 787 to British Airway and billed

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