Delta Airlines,a U.S. company bought an aircraft, A400 from Airbus and was billed 20 million payable in six months. Delta is concerned with the euro payables from international trade and would like to control exchange risk. The current spot exchange rate is $1.20/ and six-month forward exchange rate is $1.30/ at the moment. Delta can buy a six-month put option on Euro with a strike price of $1.25/ for a premium of $0.02 per Euro and Delta can buy a six-month call option on Euro with a strike price of $1.25/ for a premium of $0.03 per Euro. Currently, six-month interest rate is 4% p.a. (2% for six months) in the euro zone and 6.0% p.a. (3% for six months) in the U.S.

a. Compute the guaranteed U.S. dollar payables from the trade if Delta decides to hedge using a

forward contract. Does Delta need long or short forward hedge to control exchange risk? (4 points)

b. If Delta decides to hedge using money market instruments, what action does Delta need to take?

What would be the future value of the euro payables from the trade in this case? (4 points)

c. If Delta decides to hedge using options on Euro, does Delta need to buy put options or call options and what would be the expected euro payables from the trade? Assume that Delta regards the current forward exchange rate as an unbiased predictor of the future spot exchange rate. (4 points)