GUIDE 3.1.doc - Guide 3.1 Book Chapter 08 Management of...

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Guide 3.1Book Chapter 08Management of Transaction Exposure1. 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: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. 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 only \$14.0 million, rather than €14.6 million, had it notentered into the forward contractB. Boeing gained \$0.6 million from forward hedgingC.a) and b)D. none of the above
2. Your firm is a U.K.-based exporter of British bicycles. You have sold an order to an Italian firm for €1,000,000 worth of bicycles. Payment from the Italian firm (in €) is due in twelve months. Your firm wants to hedge the receivable into pounds. Not dollars. Use the following table for exchange rate data.Detail a strategy using futurescontractsthat will hedge your exchange rate risk. Have an estimate of how many contracts of what type. A. Borrow €970,873.79 in one year you owe €1m, which will be financed with the 1
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3. A Japanese EXPORTER has a €1,000,000 receivable due in one year. Spot and forward exchange rate data is given in the table:The one-year risk free rates are i\$= 4.03%; i= 6.05%; and i= 1%. Detail a strategy using forward contractsthat will hedge exchange rate risk.