Question

Boeing just signed a contract to sell a Boeing 737 aircraft to Air France. Air France will be billed €10.04 million payable in one year. The current spot exchange rate is 1.05 per euro and the one-year forward rate is 1.10 per euro. The annual interest rate is 6 percent in the United States and 5 percent in France. Boeing is concerned with the volatile exchange rate between the dollar and the euro and would like to hedge exchange exposure. What is the amount in dollars that Boeing will receive in one year if it does not hedge its exchange exposure?

1) €10.04 million
2) €10.54 million
3) €11.04 million
4) €11.54 million

Answer 1

Without hedging, Boeing will receive €10.04 million (option 1) from Air France. The actual amount in dollars will rely on the spot exchange rate at the time of the transaction in one year, and it's speculative to presume an exact figure .

Step-by-step explanation:

If Boeing does not hedge its exchange exposure and simply waits to convert the euros into dollars at the spot rate in one year, it will face currency risk due to a potential unfavorable change in the exchange rate. With the given spot exchange rate of 1.05 dollars per euro, Boeing is set to receive a payment from Air France of €10.04 million.

If the exchange rate will be at the one-year forward rate of 1.10 dollars per euro, this would convert to $11.04 million. However, this is a theoretical figure based on the forward rate, not the sum that Boeing will actually receive if it does not hedge.

Without hedging, Boeing is subject to the spot exchange rate prevailing in one year's time, which could be more or less favorable than the current forward rate. As the spot rate could fluctuate due to various economic factors, we can only speculate about the actual dollar amount Boeing will receive without hedging.

Thus, in terms of euros, without hedging, Boeing will still receive €10.04 million, but its equivalence in dollars will depend on the future spot exchange rate.