Reference no: EM131346608
Airbus just signed a contract to sell an A380 aircraft to Delta and Delta will be billed €150,000,000 which is payable in one year. Delta is concerned about currency risk from its euro exposure and is considering three hedging alternatives: forward hedge, money market hedge, and option hedge.
The current spot exchange rate is quoted at $1.28/€ and the one-year forward exchange rate is quoted at $1.29/€. Currently, one-year money market rates are 4% in the U.S and 3.5% in the euro zone. A one-year call option on euros with a strike or exercise price of $1.27/€ is selling at a premium of $0.03 per euro.
A. Compute the expected dollar cost of securing the euros if Delta decides to hedge using a forward contract.
B. What transactions would Delta need in order to carry out a money market hedge? Compute the guaranteed dollar cost of securing the euros if Delta decides to use a money market hedge.
C. At what forward exchange rate will Delta be indifferent between the forward hedge and the money market hedge?
D. Compute the expected dollar cost of securing the euros if Delta decides to hedge using call options on euros. Assume that Delta regards the current forward exchange rate as an unbiased predictor of the future spot exchange rate one year from now.
E. At what future spot exchange rate do you think Delta will be indifferent between the option hedge and forward hedge?
What immediate actions should marshal take to protect safety
: BOS 3640- Discuss the nuclear reactions within the reactor of a nuclear power plant? What immediate actions should the marshal take to protect public health, safety, and the environment?
|
When would it make sense for firm to call bond issue
: When would it make sense for a firm to call a bond issue? Company issues a callable (at par) ten-year, 6% coupon bond with annual coupon payments. The bond can be called at par in one year after release or any time after that on a coupon payment date..
|
The net amount of funds that the debt issue
: A firm issues $225 million in straight bonds at an original issue discount of 2.0% and a coupon rate of 6%. The firm pays fees of 4% on the face value of the bonds. The net amount of funds that the debt issue will provide for the firm is ________.
|
Forward hedge-money market hedge and option hedge
: Airbus just signed a contract to sell an A380 aircraft to Delta and Delta will be billed €150,000,000 which is payable in one year. Delta is concerned about currency risk from its euro exposure and is considering three hedging alternatives: forward h..
|
Capital budgeting calculations-pay-back-net present value
: Describe the following capital budgeting calculations. Pay-back, Net Present Value NPV, and the Internal Rate of Return. Compare the calculations to each other and briefly discuss which method you think is most useful?
|
Future value of multiple annuities
: Future Value of Multiple Annuities Assume that you contribute $190 per month to a retirement plan for 20 years. Then you are able to increase the contribution to $290 per month for another 20 years. Given a 10.5 percent interest rate, what is the val..
|
Terminated early without achieving all original objectives
: Your company experienced some cash flow issues during your last project that caused the project to be terminated early without achieving all its original objectives. You calculate the company’s Quick Ratio and find it to be 1.6. What does this tell y..
|
After the phase-out for high-income taxpayers
: Ellen and Rick are married with one dependent child. They have AGI of $355,300, and itemized deductions consisting of $20,000 state income taxes and $20,000 medical expenses, after applying the 10 percent of AGI limitation. Compute the following for ..
|