Airbus sold an A400 aircraft to Delta Airlines, a U.S. company, and billed $30 million pay-...

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Airbus sold an A400 aircraft to Delta Airlines, a U.S. company,and billed $30 million pay- able in six months. Airbus is concernedabout the euro proceeds from international sales and would like tocontrol exchange risk. The current spot exchange rate is $1.05/€and the six-month forward exchange rate is $1.10/€. Airbus can buya six-month put option on U.S. dollars with a strike price of€0.95/$ for a premium of €0.02 per U.S. dollar. Currently, six-month interest rate is 2.5 percent in the euro zone and 3.0 percentin the United States.
a. Should a firm hedge? Why or why not?
b. Compute the guaranteed euro proceeds from the American saleif Airbus decides to hedge using a forward contract.
c. If Airbus decides to hedge using money market instruments,what action does Airbus need to take? What would be the guaranteedeuro proceeds from the American sale in this case?
d. If Airbus decides to hedge using put options on U.S. dollars,what would be the “expected” euro proceeds from the American sale?Assume that Airbus regards the current forward exchange rate as anunbiased predictor of the future spot exchange rate.
e. At what future spot exchange do you think Airbus will beindifferent between the option and money market hedge?

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Answer aThe firm should hedgeHedging is a tool to minimize or eliminate currency risk in thisquestionThere are receivables in whereby the functional neededcurrency is EuroHence there is an exposure or risk of fall in EuroIn order to eliminate this risk hedging should be doneCurrently the spot rate is 15 or See Answer

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Airbus sold an A400 aircraft to Delta Airlines, a U.S. company,and billed $30 million pay- able in six months. Airbus is concernedabout the euro proceeds from international sales and would like tocontrol exchange risk. The current spot exchange rate is $1.05/€and the six-month forward exchange rate is $1.10/€. Airbus can buya six-month put option on U.S. dollars with a strike price of€0.95/$ for a premium of €0.02 per U.S. dollar. Currently, six-month interest rate is 2.5 percent in the euro zone and 3.0 percentin the United States.a. Should a firm hedge? Why or why not? b. Compute the guaranteed euro proceeds from the American saleif Airbus decides to hedge using a forward contract. c. If Airbus decides to hedge using money market instruments,what action does Airbus need to take? What would be the guaranteedeuro proceeds from the American sale in this case? d. If Airbus decides to hedge using put options on U.S. dollars,what would be the “expected” euro proceeds from the American sale?Assume that Airbus regards the current forward exchange rate as anunbiased predictor of the future spot exchange rate. e. At what future spot exchange do you think Airbus will beindifferent between the option and money market hedge?