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. Which of the following statement(s) is/are true?

On the maturity date of the contract Boeing will:

(i) have to deliver €10 million to Lufthansa.

(ii) take delivery of $14.6 million

(iii) have a zero net euro exposure

(iv) have a profit, or a loss, depending on the future changes in the exchange rate, from this British sale.

Select one:

a. (ii), and (iii)

b. (ii), (iii), and (iv)

c. (i) and (iv)

d. (ii) and (iv)

Answer 1

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Answer:

Since its forward contract at the time of maturity boeing will have to deliver 10 million euro to the bank (Option 1 incorrect)

as per the forward contract obligation with corward currency contract boeing will take delivery of $ 14.6 million(Option 2 correct) which is in USD as currency exchange so after maturity it wont have any exposure to euro (Option 3 correct)

Hence option a - ii and iii