In: Economics
Solution:
a) Airbus will sell $30 million forward for €27,272,727 = ($30,000,000) / ($1.10/€).
b) Airbus will borrow the present value of the dollar receivable,
$29,126,214 = $30,000,000/1.03, and then sell the dollar proceeds spot for euros: €27,739,251.
c) The Expected Future Spot Rate is less than the strike price of the put option,
€0.9091< €0.95, Airbus expects to exercise the option and receive,
€28,500,000 = ($30,000,000)(€0.95/$).
Airbus spent €600,000 (=0.02x30,000,000) upfront for the option and its future cost is equal to €615,000 = €600,000 x 1.025.
Thus the net euro proceeds from the American sale is €27,885,000.
d) At the indifferent future spot rate, the following will hold:
€28,432,732 = ST (30,000,000) - €615,000.
Solving for ST , the future spot exchange rate is, €0.9683/$, or $1.0327/€.
Note that €28,432,732 is the future value of the proceeds under money market hedging:
€28,432,732 = (€27,739,251) (1.025)
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