Airbus sold an aircraft to United Airlines and billed $80 million payable in three months. Airbus is concerned with euro proceeds from international sales and would like to control exchange rate risk. The current spot rate is $1.20/€ and the three -month forward exchange rate is $1.25/€. Airbus can buy a three-month put option on U.S. dollars with a strike (exercise) price € 1.10/$ for a premium of € 0.02 per U.S. dollar. Currently, three month interest rate is 1% in euro zone and 0.5% in the U.S.
A. Compute the guaranteed euro proceeds from the sale if Airbus decides to hedge using a forward contract.
B. If Airbus decides to hedge using money market instruments, what action does Airbus need to take? What would be the guaranteed euro proceeds receivable now from the American sale in this case?
C. If Airbus decides to hedge using put options on U.S. dollars, what would be the expected euro proceeds from the American sale? Assume that Airbus regards the current forward exchange rate as an unbiased predictor of the future spot exchange rate.