Reading Assignment 3 FX Hedging at EADS Questions 1. What was the aim of EADS risk management policy? How did EADS implement its risk management strategy? Please name each strategy and briefly explain. 2. From the perspective of the Middle Office and Treasury Committee, please compare forwards and options in terms of their advantages and disadvantages for the company. 3. "On April 22, 2008, the $/ exchange rate in the forward market stood at $1.55. At this level, the Speed Grid dictated a historically low pace of weekly hedging, thus inhibiting the Treasury from closing the FX risk exposure gap...Pons and his team identified several possible approaches to cover the outstanding FX exposure with derivative financial instruments" (HBR, 2015, p.8). The article then lists three approaches to tackle the FX risk exposure problem. Which approach would you adopt if you were in the shoes of Pons? Why? 4. Suppose that in the previous question you chose to purchase a three-year European call option on a notional amount of $10 billion to reduce the FX risk exposure of EADS. The option's strike price is $1.55. What are the optimal trading strategy and payoffs if: a) Outside analysts' forecast turns out to be true and the spot rate is $1.80/ at maturity. b) EADS' forecast was right and the spot rate is $1.07/ at the end of three years.