Airbus, an aircraft manufacturer, has signed a contract to deliver 4 A330-200 passenger aircrafts to Southwest Airlines, a US airline operator, for 1 billion of dollars, to be delivered in 2 years. 20% of the price is paid immediately, while the remaining 80% will be paid only after the delivery. As Airbus incurs most of its costs in Euros, the profitability of this contract is endangered by exchange rates movements. Design a hedging strategy in theoretical terms. Which derivative contracts might be suitable and why?

Airbus, an aircraft manufacturer, has signed a contract to deliver 4 A330-200 passenger aircrafts to Southwest Airlines, a US airline operator, for 1 billion of dollars, to be delivered in 2 years. 20% of the price is paid immediately, while the remaining 80% will be paid only after the delivery. As Airbus incurs most of its costs in Euros, the profitability of this contract is endangered by exchange rates movements. Design a hedging strategy in theoretical terms. Which derivative contracts might be suitable and why?

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter10: Measuring Exposure To Exchange Rate Fluctuations

Section: Chapter Questions

Problem 2ST

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Short Answer Question Airbus, an aircraft manufacturer, has signed a contract to deliver 4 A330-200 passenger aircrafts to Southwest Airlines, a US airline operator, for 1 billion of dollars, to be delivered in 2 years. 20% of the price is paid immediately, while the remaining 80% will be paid only after the delivery. As Airbus incurs most of its costs in Euros, the profitability of this contract is endangered by exchange rates movements. Design a hedging strategy in theoretical terms. Which derivative contracts might be suitable and why?
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