Mini Case AirBus
his “Mini Case” is about Airbus’ Dollar Exposure and managing foreign exchange risk using different hedging
strategies.
Here’s what’s happening in the question:
Scenario
• Who? Airbus (European company) sells an A400 aircraft to Delta Airlines (U.S. company).
• Sale amount: $30 million, payable in six months.
• Airbus wants to protect itself from exchange rate risk because the payment is in U.S. dollars but
Airbus’ home currency is euro (€).
Given Data
• Current spot exchange rate: $1.05/€ → means 1 euro = 1.05 U.S. dollars.
• Six-month forward exchange rate: $1.10/€
• Put option on U.S. dollars:
o Strike price: €0.95/$ (means 1 dollar = 0.95 euro)
o Premium: €0.02 per U.S. dollar
• Six-month interest rates:
o Eurozone: 2.5% (so for 6 months, ~1.25%)
o United States: 3.0% (so for 6 months, ~1.5%)
What Airbus Wants to Know
They’re exploring three different hedging strategies and one “break-even” question:
Q1. Forward Contract Hedge
If Airbus hedges by selling dollars forward, they lock in a fixed exchange rate in six months.
You need to calculate the guaranteed euro proceeds from the $30M sale using the six-month forward rate
($1.10/€).
Q2. Money Market Hedge
Instead of a forward contract, Airbus can use interest rates to hedge:
1. Borrow dollars now (present value of $30M discounted at U.S. 6-month interest rate).
2. Convert dollars to euros today at the spot rate.
3. Invest euros at Eurozone interest rates for 6 months.
At maturity, use the U.S. dollar payment from Delta to repay the dollar loan.
The task: Find the guaranteed euro proceeds.
Q3. Option Hedge
If Airbus buys a put option on USD, they secure the right (but not obligation) to sell USD at a fixed euro rate
(€0.95/$).
• Need to compute the expected euro proceeds assuming the forward rate is the unbiased predictor
of the future spot rate.
• Deduct the option premium from proceeds.
Q4. Indifference Point
Find the future spot exchange rate at which Airbus would be indifferent between using the option hedge and
the money market hedge.
• This is a break-even analysis comparing the two methods.
Numericals :
Alright — let’s solve this Airbus Dollar Exposure case step-by-step.
Given Data Recap
Item Value
Sale Amount $30,000,000
Current Spot Rate $1.05/€
Six-Month Forward Rate $1.10/€
Put Option Strike Price €0.95/$
Option Premium €0.02 per $
Eurozone 6-month interest rate 2.5% annual → 1.25% for 6 months
U.S. 6-month interest rate 3.0% annual → 1.5% for 6 months
Q1. Forward Contract Hedge
Formula:
\text{Euro Proceeds} = \frac{\text{Dollar Amount}}{\text{Forward Rate ($/€)}}
Euro Proceeds=30,000,0001.10=€27,272,727.27\text{Euro Proceeds} = \frac{30,000,000}{1.10} =
€27,272,727.27Euro Proceeds=1.1030,000,000=€27,272,727.27
✅ Guaranteed proceeds: €27.273 million
Q2. Money Market Hedge
Step 1: Find Present Value of $30M in USD
Discount at 1.5% (6-month U.S. interest rate):
PV$=30,000,0001+0.015=30,000,000/1.015=29,554,140.13 $PV_{\$} = \frac{30,000,000}{1 + 0.015} =
30,000,000 / 1.015 = 29,554,140.13 \ \$PV$=1+0.01530,000,000=30,000,000/1.015=29,554,140.13 $
Step 2: Convert to euros at spot rate $1.05/€
PV€=29,554,140.131.05=28,146,800.12 €PV_{€} = \frac{29,554,140.13}{1.05} = 28,146,800.12 \ €PV€
=1.0529,554,140.13=28,146,800.12 €
Step 3: Invest euros for 6 months at 1.25%
FV€=28,146,800.12×(1+0.0125)=28,498,135.12 €FV_{€} = 28,146,800.12 \times (1 + 0.0125) = 28,498,135.12 \
€FV€=28,146,800.12×(1+0.0125)=28,498,135.12 €
✅ Guaranteed proceeds (money market hedge): €28.498 million
Q3. Option Hedge
• Strike price: €0.95/$ means Airbus can sell each dollar for 0.95 euro.
• Option premium: €0.02 per $ → total premium:
30,000,000×0.02=600,000 €30,000,000 \times 0.02 = 600,000\ €30,000,000×0.02=600,000 €
• Expected spot rate: Forward rate ($1.10/€) as unbiased predictor.
First convert $1.10/€ into €/USD:
1 / 1.10 = 0.9091 \ \text{€ per $}
Payoff:
Since 0.9091 €/USD < 0.95 €/USD strike, the option will be exercised.
Euro proceeds before premium:
30,000,000×0.95=28,500,000 €30,000,000 \times 0.95 = 28,500,000 \ €30,000,000×0.95=28,500,000 €
After subtracting premium:
28,500,000−600,000=27,900,000 €28,500,000 - 600,000 = 27,900,000 \ €28,500,000−600,000=27,900,000 €
✅ Expected proceeds (option hedge): €27.9 million
Q4. Indifference Point (Option vs Money Market)
We set Option Proceeds = Money Market Proceeds.
Let SSS = future spot rate in €/USD.
• Option proceeds:
o If S<0.95S < 0.95S<0.95: option exercised, proceeds = €28.5M – €0.6M = €27.9M
o If S≥0.95S ≥ 0.95S≥0.95: no exercise, proceeds = 30,000,000×S−0.6M30,000,000 \times S -
0.6M30,000,000×S−0.6M
Since money market hedge gives €28.498M, indifference will occur when option not exercised (because
money market > exercised option payoff).
So set:
30,000,000×S−600,000=28,498,13530,000,000 \times S - 600,000 =
28,498,13530,000,000×S−600,000=28,498,135 30,000,000×S=29,098,13530,000,000 \times S =
29,098,13530,000,000×S=29,098,135 S=0.9699 €/USDS = 0.9699 \ \text{€/USD}S=0.9699 €/USD
✅ Indifference point: 0.97 €/USD (approx.)
If future spot > 0.97 €/USD, option hedge better; if lower, money market hedge better.
Final Answers
1. Forward contract: €27.273M
2. Money market: €28.498M
3. Option hedge: €27.9M
4. Indifference point: €0.97/$
