Airbus sold an aircraft to Delta Airlines and billed $30 million payable in six months. Airbus is concerned with the euro proceeds from the international sales and would like to control exchange risk. The current spot exchange rate is ($1.45/euro) and six month forward exchange rate is ($1.55/euro) at the moment. Airbus can buy a six month put option on the US dollars with a strike price of (1.35 euro/$) for a premium of 0.03 euro per U.S. dollar. Currently, six month interest rate is 5.5% in the euro zone and 7% in the U.S.

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 the guaranteed euro proceeds from the American sale be in this case?

c) If Airbus decides to hedge using put options on the U.S dollars, what would the expected euro proceeds from the American sale be? Assume that Airbus regards the current forward exchange rate as an unbiased predictor of the future spot exchange rate. (i.e. Fo($1.55/euro)

d) At what future spot rate would Airbus be indifferent between the option and money market hedge?