PROBLEM 3: Airbus' Dollar Exposure 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 $1.1963/ at the moment. Airbus can buy a six- month put option on U.S. dollars with a strike price of 0.8400 per U.S. dollar for a premium of 0.0120 per U.S. dollar. Currently, the six-month LIBOR rate for Euro is -0.54800% per year (assume this is the interest rate in Euros), and for Eurodollar, it is 0.22600%% per year (assume this is the rate on US$). 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.

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 current economic environments and the outlook for the exchange rate for US dollar against Euro 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 increase and decrease by 1%, 5% and 10% respectively. 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 Note on Report Requirements 1. Report must include tables in the appendices to show your results, and a plot of the outcomes for the various strategies discussed in the report. 2. Using Excel to show the calculations for the various hedging strategies and graph the outcomes for the various hedging strategies (i.e., 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%.