Details of this Paper

Due to the rapid increase in popularity of Jet Blue, they have decided to expand their fleet.

Description

solution


Question

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-2015

Price : $27
SiteLock