Currency risk in the travel industry. Ulysses Travel Ltd (UTL) is a Boston-based travel operator that specializes in tour and holiday packages with destinations in Spain, Italy, and Greece where vendors (hotels and transportation companies)

accept payment in € only. UTL was firming its bookings in late October 1, 2013, for the following summer season (June–September 2014), although payment in the amount of €65 million was not due until April 1, 2014. UTL had to decide on prices to charge its clients in October so that brochures could be printed in the fall and customers could start booking their travel and hotel reservations in the following spring. Holidaymakers, however, decided on their travel plans only in late spring and, being U.S. nationals, they were quoted prices in U.S.

dollars. UTL had to decide how to manage its upcoming € payment. Six-month forward contracts were quoted at €0.6271 = US$1 whereas the spot exchange rate stood at €0.6298 = US$1. UTL could borrow/lend US$ at 2. 70%/2.55%

annually and € at annual rates of 1. 85%/1.65%.

a. What is the nature of Ulysses Travel’s exposure to currency risk?

b. How could UTL hedge its exposure?