Boeing be indifferent between two hedging methods

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Reference no: EM131582318

Boeing just signed a contract to sell a Boeing Dreamliner aircraft to Alitalia Airlines. Alitalia will be billed €50 million which is payable in one year. The current spot exchange rate is $1.1700/€ and the one-year forward rate is $1.2000€. The annual interest rate is 5.0% in the U.S. and 4.0% in Italy. Boeing is concerned with the volatile exchange rate between the dollar and the euro and would like to hedge exchange exposure.

It is considering two hedging alternatives: sell the euro proceeds from the sale forward or borrow euros from UBS Bank against the euro receivable. Which alternative would you recommend? Why?

Other things being equal, at what forward exchange rate would Boeing be indifferent between the two hedging methods? (express your answer to six decimal places)

Reference no: EM131582318

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