Question: 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/ and the one-year forward rate is $1.10/. Interest rate is 6.0% per annum in the U.S. and 5.0% per annum in France. Boeing is concerned with the volatile exchange rate between the dollar and the Euro and would like to hedge its foreign currency exposure.

(1) Implement forward hedge for Boeing. Conduct cash flow analysis to show the result of this forward hedge.

(2) Implement money market hedge (MMH) for Boeing. Conduct cash flow analysis to show the result of MMH.

(3) Which hedging strategy would you recommend? Explain.

(4) Other things being equal, at what forward rate would Boeing be indifferent between forward hedge and MMH?

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