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Explain how Airbus can eliminate the exchange rate exposure

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Question - Airbus has a foreign-currency denominated payable, it can hedge by buying the foreign currency payable forward. The company can expect to eliminate the exposure without incurring costs as long as the forward exchange rate is an unbiased predictor of the future spot rate. Airbus exported an A380 to a UK company, and was billed the sum of £ 12,000,000 payable in three months. Currently the spot rate is $1.40/£ and the three-month forward rate is $1.36/£.The three-month money market interest rate is 12% per annum in US and 8% per annum in UK. So the management of Airbus decided to manage this transaction exposure and use the money market hedge to deal with this pound account payable. Explain how Airbus can eliminate the exchange rate exposure.

Reference no: EM133039439

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