Airbus delivered two A330-200 aircrafts to Delta Airlines, a U.S. company, and billed Delta a total of U$460 million payable in six months. Airbus is concerned with the US dollar proceeds from the international sales and would like to control the exchange rate risk. The current spot exchange rate is $1.1915/ and six-month forward exchange rate is $1.1963/ at the moment. Airbus can buy a six-month put option on U.S. dollars with a strike price of 0.8400 per U.S. dollar for a premium of 0.0120 per U.S. dollar. Currently, the annualized six-month interest rate in Euros is 2.97% and for the US Dollar, it is 2.54% (You may divide these rates by 2 to get a six-month interest rate).

Note: Airbus is a European company and as such would like all sales proceeds computed in Euro. Its cost of capital is in Euro. US dollar is a commodity to Airbus, and they would like everything priced in Euro.

You work for Airbus and must submit a report to management on the firms exposure.

Required Management Report (also include an executive summary) and the following suggested outline:

a. Purpose of the Report discuss the purpose of the report

b. Background, Issues and Major Concerns

o Describe the transaction

o Discuss the major concerns or issues Airbus faces with this particular transaction

c. Examine the various hedging alternatives (unhedged, forward, money market, option). In evaluating the various alternatives, show what can happen to the exposure if exchange rates stay the same, or increase and decrease by 1%, 5% and 10% respectively. Hence,

you will have 7 possible scenarios and assume all are equally likely. Your possible scenarios will be:

Spot Rate Change Scenario	Probability
-10%	1/7
-5%	1/7

-1%	1/7
0%	1/7
1%	1/7
5%	1/7
10%	1/7

d. Given the issues you have highlighted in Part (b), discuss the strengths and weaknesses of the strategy you would recommend to Airbus.

e. Conclusions