Question 2 Mr. John Buffet is the owner of T&T Air. Mr. Buffet is having discussions with another aircraft dealer in Japan - Team Air, about selling the companys planes to Venezuela. Donald a sales representative from Team Air wants to add T&T Air to its current retail line in Venezuela. Mr. Buffet estimates that T&T Air can earn additional revenue via this new line in Venezuela of $500 million bolivars a month. All sale will be in US$ and Donald with retain a 5% of all the retail sales as a commission which also will be paid in US$. All the planes will be customised as per order and the first sale is expected in one month. It was also agreed that Mr. Buffet will pay Team Air, 90 days after the order was filled. This payment requirement will continue for the duration of the contract. Mr. Buffet is confident that his company can handle this new venture in Venezuela, but is concerned about the potential financial risk of selling their planes in Venezuela. In a discussion with Donald, Mr. Buffet found out that the current exchange rate is 20 bolivars / US$. At the current exchange rate the company will spend 80% of its sales on production cost, excluding Donalds sale commission. Mr. Buffet asked his Chief Financial Officer, Mr. Sorros to prepare an analysis of the proposed international sales, specifically referencing following questions.

How can T&T Air hedge its exchange rate risk? What are the implications for this approach?