Question

Airbus sold an A400 aircraft to Delta Airlines, a U.S. company, and billed $30 million payable in six months. Airbus is concerned about the euro proceeds from international sales and would like to control exchange risk. The current spot exchange rate is $1.05/€ and the six-month forward exchange rate is $1.10/€. Airbus can buy a six-month put option on U.S. dollars with a strike price of €0.95/$ 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 percent in the United States.

a. Compute the guaranteed euro proceeds from the American sale if Airbus decides to hedge using a forward contract.

b. If Airbus decides to hedge using money market instruments, what action does Airbus need to take? What would be the guaranteed euro proceeds from the American sale in this case?

c. 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 an unbiased predictor of the future spot exchange rate.

Answer 1

a]	Guaranteed euro proceeds using a forward contract = 30000000/1.1 =	€      2,72,72,727
b]	AS the receivable is in $, a payable in $ of an amout
	that will be $30,000,000 in 6 months should be created.
	For that, a dollar loan is to be taken. Amount of the
	dollar loan = 30,000,000/1.03 =	$      2,91,26,214
	This $29,126,214 will be coverted to Euro at spot to get 29126214/1.1 =	€      2,64,78,376
	The converted euros will be deposted for 180 days to have a maturity value of 26478376*1.025 =	€      2,71,40,335
	On the due date, the receivable of $30,000,000 will be
	collected and the dollar loan together with interest
	which, will also amount to $30,000,000, will be paid off.
	The guranteed amount against the receivable will be the maturity value of the euro deposit. It is	€      2,71,40,335
c]	Spot rate after 6 months [Euro/$] = 1/1.1 =	€ 0.9091
	As the strike price of dollar is more than the spot rate after 6 months, the option will be exercised
	Amount receivable against the put option = 30000000*0.95 =	€      2,85,00,000
	Less: FV of Option premium payable upfront = 30000000*0.02*1.025 =	€ 6,15,000
	Net receivable	€      2,78,85,000