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 $1.1963/ at the moment. Airbus can buy a sixmonth put option on U.S. dollars with a strike price of 0.8400 per U.S. dollar for a premium of 0.0120 per U.S. dollar. Currently, the six-month LIBOR rate for Euro is -0.54800% per year (assume this is the interest rate in Euros), and for Eurodollar, it is 0.22600%% per year (assume this is the rate on US$).

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.

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 increase and decrease by 1%, 5% and 10% respectively.