Airbus, the European civil aircraft manufacturer, purchased a batch of engines for its A320 model from the US aerospace manufacturer Pratt & Whitney and was billed in US dollars, $3 billion payable in six months. Currently the spot exchange rate is $1.11/€ and the three-month forward rate is $1.10/€. The three-month money market interest rate is 0.25% p.a. in Europe and 0.5% p.a. in the US.

Should the management of Airbus use the forward or the money market to hedge currency risk?

The added difficulty that the $3 billion is payable in SIX months, but the Forward rate is given as THREE months. Also, can I earn interest on a forward or do I just buy it? 

Answer rating: 100% (QA)

SOLUTION In this scenario Airbus is facing currency risk due to the fact that they have a liability of 3 billion payable in six months but they operat... View the full answer