Due to the rapid increase in popularity of Jet Blue, they have decided to expand their fleet. They;purchase an Airbus A380 and are billed $75 million, payable in nine months. Airbus, being a European;firm, is concerned about their current exposure to the dollar through this accounts payable to them (i.e.;they have an accounts receivable), and are interested in finding ways to hedge. They decide to explore;all options and they receive the following financial information;Spot exchange rate: $1.3540/;Nine month forward: $1.4250/;Premium on nine month put option with a strike price of 0.7500/$: 0.11/$;Nine month borrowing rate in the for Airbus: 3%;Nine month lending rate in the for Airbus: 2%;Nine month borrowing rate in the $ for Airbus: 7%;Nine month lending rate in the $ for Airbus: 6%;Compute all the following in euros with the value when the payment is received (i.e. nine months from;today).;a) What is the guaranteed revenue if Airbus decides to use a forward contract to hedge?;b) Describe a hedge using money market instruments. What is the guaranteed revenue?;c) What is the expected revenue from using options? Note here that you have to make some;assumption about what the expected future exchange rate will be. Please justify your;assumption carefully.;d) What is the future exchange rate such that the value of the accounts receivable combined with;the hedge to Airbus is equal for both the forward hedge and the option hedge?;e) How would you determine which hedge is optimal? Are there some strategies that you can;clearly rule out?
Paper#30329 | Written in 18-Jul-2015Price : $27