An Airbus jetliner is the product of highly-efficient cooperation across the companys global supply and manufacturing chains located in Europe, the US and Asian countries. With continuous strong demand of airplane fleets globally, Airbus is accomplishing these through integrated production lines and cross-functional alignment in Airbus value chain activities. Recognizing the challenging global business landscape in terms of company competitiveness, Airbus was in the process to deploy Airbus industrial strategy and ensure best-in-class industrial standards for Airbus and the extended enterprises. Airbus production plants are located in Germany, France, the UK, Spain, the USA and Canada. As autonomous entities, the plants received strong support from reliable network of suppliers across the globe. One of the Airbus main plants, Getafe, located in central Spain, specialises in aeronautical component engineering, design, production and assembly. The plant is the delivery centre for final assembly lines for all aircraft fleet including the A380 fleet for European customers. Getafe uses metallic material and advanced composite materials to manufacture fuselage for all Airbus aircraft and specialises in the final assembly, systems testing and testing of all the planes. Getafe plant received the material supplies mainly from China and Australia. Airbus also has a long term contract with Malaysian supplier with speciality to manufacture plane wings for the A380 fleets. All materials and supplies from oversea suppliers make up for more than 50% of operating expenditures in Getafe plant. Transactions with China suppliers are in Yuan, and in USD for Australia and Malaysian suppliers, while all sales are invoiced in Euro. With increasing global economic uncertainties and weakening of Euro () against other foreign currencies (in particular USD and CNY), the manager of Getafe plant is very concerned that he will not be able to achieve KPIs targets for the year if he did not manage the operating expenditures of the plant well. Getafe plants functional currency is Euro (). Additional information, From recent monthly updates, the following foreign currency exposures were highlighted to be managed:

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a) A payment of CNY30,050,000 which is due in 4 months to material suppliers from China. However, 10% of the outstanding amount is still under dispute due to materials delivered failed to meet purchase contract requirements. b) A purchase invoice received from Malaysian supplier amounting to USD5,000,000 was still unhedged following the strong position of Euro () against USD 2 months ago. The rationale behind such move was to minimize transaction costs. The payment is due in 2 months. The following foreign currency rates were quoted by one of the panel banks in Spain as follows: (forward rate is for settlement within 1 year). Foreign Currency (FCY) Spot rate (/ FCY) Forward rate (/FCY) The US Dollar (USD) 0.9403 0.9438 China Yuan (CNY) 0.1261 0.1324

Currency options (options can be exercised until expiry date) Exercise price quotation for USD: per USD1; premium: per USD1 Euro () Call options premium () Put Options premium () Exercise price 3-month expiry 6-month expiry 3-month expiry 6-month expiry 0.94 0.0195 0.0283 0.0149 0.0224 0.95 0.0141 0.0229 0.0196 0.0271

Exercise price quotation for CNY: per CNY1; premium: per CNY1 Euro () Call options premium () Put Options premium () Exercise price 3-month expiry 6-month expiry 3-month expiry 6-month expiry 0.13 0.0166 0.0254 0.0120 0.0195 0.14 0.0113 0.0201 0.0167 0.0242

Required,

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a) Advise Airbus Getafe plant manager on an appropriate hedging strategy using the above-mentioned currency derivatives to manage the foreign exchange exposure of the CNY and USD payments as follows (Show all relevant calculation to justify hedging strategy to be advised). i. A payment of CNY30,050,000 to material supplier in China

(5 marks)

ii. A payment of USD5,000,000 to the Malaysian supplier

(5 marks)

b) Besides hedging strategies in (a), explain TWO methods to reduce exchange rate exposure to be considered by the manager.

(4 marks) c) Evaluate the decision made by Getafe manager for not hedging the exposure for purchase invoice from Malaysian supplier.

(2 marks) d) Assuming the weakening of Euro will continue to decline in foreseeable futures, and the standard deviation (based on 95% confidence level) of quarterly percentage changes of USD is 5%, estimate the maximum possible one quarter loss in Euro if the USD will appreciate by 2% using Value at Risk (VaR) method. The quarter rate of USD is similar to forward rate quoted by the bank.

(2 marks) e) Considering Airbus plants mentioned above, name relevant plants subjected to translation exposure resulting from foreign exchange rate movements. Justify.