Suppose Boeing Corporation exported a Boeing 787 to British Airway (BA) and billed BA £15 million payable in one year. The money market rates and foreign exchange rates are given as follows:
The U.S. one-year interest rate: 3.25% per annum
The U.K. one-year interest rate: 1.75% per annum
The spot exchange rate: $1.35/£
Show the money market hedge strategy that the company can use to hedge the company’s transaction exposure. Be sure to include the following.
1. State which currency Boeing should borrow and which to invest.
2. Calculate how much Boeing should borrow or invest.
3. State the transactions needed to be done and the cash flows at t=0 and t=12 by constructing a cash flow table.