Airbus has a foreign-currency denominated payable, itcan hedge by buying the foreign currency payable

forward. The company can expect to eliminate theexposure without incurring costs as long as the forward

exchange rate is an unbiased predictor of the future spotrate. 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 marketinterest rate is 12% per annum in US and 8% per annumin UK.So the management of Airbus decided to manage

this transaction exposure and use the money markethedge to deal with this pound account payable.

(i) Explain how Airbus can eliminate the exchange rateexposure and compute the dollar cost of meeting the

pound obligation.[5,5 marks]

(ii) Conduct a cash flow analysis of the money market

hedge.

(iii) Compare and contrast the cash flow at maturity andthe net dollar proceeds if instead the options market

hedge is used by Airbus. You may assume a put optionof 12,000,000 with an exercise price of $1.36/ with

a three-month expiration and an option premium of $0.05 per .

Answer rating: 100% (QA)

i To eliminate exchange rate exposure Airbus can enter into a forward contract to sell 12 million in ... View the full answer