What would be the expected euro proceeds from the american

Reference no: EM131114468

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.

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

2. 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?

3. 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.

4 At what future spot exchange do you think Airbus will be indifferent between the option and money market hedge?

Reference no: EM131114468

Questions Cloud

Explain the following statement exposure is the regression : Explain the following statement: "Exposure is the regression coefficient."

Student wishes to charge these costs against revenue : One student wishes to charge these costs against revenue in the current period another wishes to defer these costs and amortize them in the future. Which student is correct?

How would you define economic exposure to exchange risk : How would you define economic exposure to exchange risk?

What is the amount of research and development costs : What is the amount of research and development costs that Austin Powers should record in 2009 as a charge to expense?

What would be the expected euro proceeds from the american : What would be the guaranteed euro proceeds from the American sale in this case? 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 fo..

Indicate the proper accounting for the following items : Indicate the proper accounting for the following items.(a) Organization costs.(b) Advertising costs.(c) Operating losses.

Which of the following activities should be expensed : Which of the following activities should be expensed currently as R & D costs?

What is the recommended accounting treatment : Indirect costs. What is the recommended accounting treatment for these three types of R & D costs?

User Account

All Pages