Question
Airbus, the European civil aircraft manufacturer, purchased a batch of engines for its A320 model from the US aerospace manufacturer Pratt & Whitney and was
Airbus, the European civil aircraft manufacturer, purchased a batch of engines for its A320 model from the US aerospace manufacturer Pratt & Whitney and was billed in US dollars, $3 billion payable in six months. Currently the spot exchange rate is $1.11/€ and the three-month forward rate is $1.10/€. The three-month money market interest rate is 0.25% p.a. in Europe and 0.5% p.a. in the US.
Should the management of Airbus use the forward or the money market to hedge currency risk?
The added difficulty that the $3 billion is payable in SIX months, but the Forward rate is given as THREE months. Also, can I earn interest on a forward or do I just buy it?
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SOLUTION In this scenario Airbus is facing currency risk due to the fact that they have a liability of 3 billion payable in six months but they operat...
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Statistical Techniques In Business And Economics
Authors: Douglas Lind, William Marchal
16th Edition
78020522, 978-0078020520
