7. Shocker Jet Corporation builds small aircraft in Wichita. Nearly all of its inputs are purchased in the United States. Shocker recently received the largest order in company history to sell small jets to a buyer in France. The order locks in a price in euros for the aircraft, with payment due on delivery in six months. Shocker jet is worried that the value of the euro may drop over the next six months, so that the production costs in the U.S. will be unaffected but the payment from the sale will be worth fewer dollars.

a. (6 points) Using forward contracts, how can Shocker Jet Corporation hedge its exchange rate exposure? Briefly explain how Shocker Jet Corporation would offset its exchange rate exposure using the type of forward contract you identify.

b. (6 points) Using currency options, how can Shocker Jet Corporation hedge its exchange rate? Briefly explain how Shocker Jet Corporation would offset its exchange rate using the type of currency option you identify.

c. (6 points) Suppose that Shocker Jet has no information indicating that interest rates or inflation rates in the two countries will change in any particular direction. Thus, if any such changes occur that are more favorable for one country over the other, they will be unexpected and not anticipated in current markets. Is Shocker Jet better of hedging with the forward contract from part a or the currency option from part b? Briefly explain your choice, or whether the benefits are the same.

Using currency options, how can Shocker Jet Corporation hedge its exchange rate? Briefly explain how Shocker Jet Corporation would offset its exchange rate using the type of currency option you identify.