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 Americansale if Airbus decides to hedge using a forward contract.c. If Airbus decides to hedge using money market instruments, whataction does Airbus need to take? What would be the guaranteed europroceeds from the American sale in this case? d. IfAirbus decides to hedge using put options on U.S. dollars, whatwould 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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a Yes the firm should hedge The reason is that hedging will help in determining the future outflow or inflow in domestic currency on the day the transaction in foreign currency is enered into One can be prepared for the impact b Guaranteed euro proceeds from 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 Americansale if Airbus decides to hedge using a forward contract.c. If Airbus decides to hedge using money market instruments, whataction does Airbus need to take? What would be the guaranteed europroceeds from the American sale in this case? d. IfAirbus decides to hedge using put options on U.S. dollars, whatwould 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?