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: $\begin{array}{ll}
\text { The U.S. one-vear interest rate: } & 6.10 \% \text { per annum } \
\text { The euro zone one-year interest rate: } & 9.00 \% \text { per annum } \
\text { The spot exchange rate: } & \$ 1.50/€ \
\text { The one-year forward exchange rate } & \$ 1.46 /€
\end{array}$ 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 is/are true? On the maturity date of the contract Boeing will
(i)have to deliver €10 million to the bank (the counter party of the forward contract).
(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.
A)(i)and (iv)
B)(ii)and (iv)
C)(ii),(iii),and (iv)
D)(i),(ii),and (iii)

Question

Quizplus · Accepted Answer

(i) Boeing will have to deliver €10 million to the counterparty as per the forward contract agreement. (ii) In return, Boeing will receive $14.6 million, which is the result of the forward contract rate of $1.46/€ applied to the €10 million. (iii) By entering into the forward contract, Boeing locks in the exchange rate for the future transaction, thus eliminating its exposure to future euro exchange rate fluctuations. This means Boeing's net euro exposure becomes zero once the contract is executed. (iv) is incorrect because the profit or loss from the forward contract is predetermined by the forward exchange rate ($1.46/€), not by future exchange rate changes.

Suppose That Boeing Corporation Exported a Boeing 747 to Lufthansa