No SIM = 01:14 @ 42% (4) Problem_Set 2 -v Cancel Problem Set Management of Transaction Exposure 9. Airbus sold an aircraft, A400, to Delta Airlines, a U.S. company, and billed $30 million payable in six months. Airbus is concerned with 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 $1.10/ at the moment. Airbus can buy a six-month put option on U.S. dollars with a strike price of 0.95/$ for a premium of 0.02 per U.S. dollar. Currently, the annualized six-month interest rate is 5.0% in the euro zone and 6.0% in the U.S. (a) (b) Suppose that Airbus gave Delta Airlines a choice of paying either $30 million or 29.4 million in six months. In this case, this means Airbus effectively gave Delta Airlines a free option to buy up to $30 million using euros. What is the \"implied\" exercise exchange rate of this option? (c) Continue with case (b). If the spot exchange rate six months later turns out to be $1.00/, which currency do you think Delta Airlines will choose to use for payment? What is the value of this free option for Delta Airlines? From now on, consider the problem of exposure hedging from the perspective of Airbus. (d) Compute the guaranteed euro proceeds from the American sale if Airbus decides to hedge using a forward contract. (e) If Airbus decides to hedge using money market instruments, what action does Airbus need to take? What would be the guaranteed euro proceeds from the American sale in this case? Which strategy does Airbus prefer when hedging her foreign exchange risk, forward contract or money market hedging? (f) If Airbus decides to hedge using put options on U.S. dollars, what would be the \"expected\" future euro proceeds from the American sale? Assume that Airbus regards the current forward exchange rate as an unbiased predictor of the future spot exchange rate. (g) At what future spot exchange rate do you think Airbus will be indifferent between the option and money market hedge? At this break-even future spot exchange rate, will the option be exercised or not? (h) Illustrate graphically the future euro proceeds of the FX receivable against the future /$ spot exchange rate under both the option and the money market hedging. (i) Interest Rate and Currency Swaps 10. Company A is a AAA-rated firm desiring to issue five-year FRNs. It finds that it can issue FRNs at six-month LIBOR + .125 percent or at three-month LIBOR + .125 percent. Given its asset structure, three-month LIBOR is the preferred index. Company B is an A-rated firm that also desires to issue five-year FRNs. It finds it can issue at six-month LIBOR + 1.0 percent or at three-month LIBOR + .625 percent. Given its asset structure, six-month LIBOR is the preferred index. Assume a notional principal of $15,000,000. Determine the QSD and set up a floating-for-floating rate swap where the swap bank receives .125 percent and the two counterparties share the remaining savings equally. 4 Q =F