Suppose that Boeing Corporation exported a Boeing 747 to British Airways and billed £10 million payable in one year. The money market interest rates and foreign exchange rates are given as follows:
The U.S. interest rate: 6.10% per annum
The U.K. interest rate: 9.00% per annum
The spot exchange rate: $1.50/£
The forward exchange rate: $1.46/£ (1-year maturity)
-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 would have received $14.0 million, rather than $14.6 million, had it entered into the forward contract.
B) Boeing lost $0.6 million from forward hedging.
C) Boeing gained $0.6 million from forward hedging.
D) None of these.

Question

Quizplus · Accepted Answer

Boeing gained from forward hedging because it locked in a rate of $1.46/£ for £10 million, resulting in $14.6 million, whereas the spot rate at maturity was $1.40/£, which would have resulted in only $14 million.

Suppose That Boeing Corporation Exported a Boeing 747 to British