# FIN 3410 Lecture Notes - Lecture 10: European Route E20

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7 Feb 2017
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Day 10 Notes
EX CH8 4
Background
Hedging receivable
Receivable = E 20 mil
N = 1 year
So = \$1.05/E
F1 = \$1.10/E
I\$ = 6%
IE = 5%
Boeing’s FX risk
o E depreciation against \$
o \$ value of E 20 mil down
A. 2 hedging alternatives:
a. FH forward sale of receivable (a short forward)
b. MMH Borrow E against receivable
i. E \$
ii. Invest \$ in the US
B. Which alternative is recommended? Why?
a. Receivable = E 20 mil
b. Concerned with \$ proceeds (\$ revenues) from E receivable
c. Recommend a hedging method with higher \$ proceeds
i. FV(FH) = ?
ii. FV(MMH) = ?
A)
FV(FH)
Receivable = E 20 mil
Hedge with a short forward
Agree to sell E 20 mil in one year @ F1 = \$1.10/E
FV(FH) = E 20 mil * \$1.10/E = \$ 22 mil
FV(MMH)
1. Borrow E against receivable
a. E loan = PV(receivable) = PV (E 20 mil)
b. E 20,000,000 / (1 + 0.05) = E 19,047,619
2. Exchange borrowed E for \$
a. E 19,047,619 * (\$1.05/E) = \$20,000,000
3. Invest \$20,000,000 in the US for 1 year @ I\$ = 6%
a. FV(MMH) = (\$investmenttoday) * (1+i\$)
b. FV(MMH) = \$20,000,000 * (1+ 0.06) = \$21,200,000
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