Question
Suppose that in January 2020, Delta Airlines enters into a contract with Airbus France to purchase a few A330s. Payment of 1 billion is due
Suppose that in January 2020, Delta Airlines enters into a contract with Airbus France to purchase a few A330s. Payment of 1 billion is due in one year. At the time Delta signed this contract the exchange rate was 1.5$/. Suppose that Deltas hedging alternatives are as follows:
Cover 50% of exposure with a forward contract at a price of 1.5 $/ and keep the remaining amount unhedged. Cover 100% of exposure with a call option on the Euro at an exercise price of 1.5 $/. The upfront cost for the call option is 5% of the value of the option. Cover 50% of exposure with a call option on the Euro at an exercise price of 1.5 $/. The upfront cost for the call option is 5% of the value of the option. The remaining amount would be unhedged. Suppose that in January 2021, at the time that the payment has to be made, the exchange rate is equal to 2 $/. The overall $ cost to Delta of a 50% forward, a full call option, and a 50% call option are, respectively:
a. $1.75 bn, $1.575 bn. $1.7875 bn
b. $1.75 bn, $1.5 bn, $1.05 bn
c. $1.75 bn, $1.0575 bn, $1.07875 bn
d. $1.5 bn, $1 bn, $500 mn
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