Compute the guaranteed euro proceeds from the American sale if Airbus decides

MINI CASE: AIRBUS’ DOLLAR EXPOSUREAirbus sold an aircraft, A400, to Delta Airlines, a U.S. company, and billed million payable in six months. Airbus is concerned with the europroceeds from international sales and would like to control exchange risk.The current spot exchange rate is $1.05/€ and six-month forward exchangerate is $1.10/€ at the moment. Airbus can buy a six-month put option on U.S.dollars with a strike price of €0.95/$ for a premium of €0.02 per U.S. dollar.Currently, six-month interest rate is 2.5% in the euro zone and 3.0% in theU.S.1. Compute the guaranteed euro proceeds from the American sale ifAirbus decides to hedge using a forward contract.2. If Airbus decides to hedge using money market instruments, whataction does Airbus need to take? What would be the guaranteed europroceeds from the American sale in this case?3. If Airbus decides to hedge using put options on U.S. dollars, whatwould be the ‘expected’ euro proceeds from the American sale?Assume that Airbus regards the current forward exchange rate as anunbiased predictor of the future spot exchange rate.4. At what future spot exchange rate do you think Airbus will beindifferent between the option and money market hedge?

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