Airbus sold an aircraft to an American company for $30 million payable in six months. To hedge against currency risk, Airbus considered three options: a forward contract, money market hedge, or put options. If Airbus used a forward contract with a rate of $1.10/Euro, their guaranteed euro proceeds would be $30 million / $1.10 per euro = Euro 27.27 million. Using money market instruments, Airbus would deposit dollars at 3% interest and euros at 2.5% interest to receive Euro 27.27 million. With put options costing $0.02 per euro and a strike of $0.95/euro, Airbus's expected euro proceeds

1. Numerical
Direct and Indirect Quote
Cross Currency
Hedging – Forward contracts

2. Direct and Indirect Quotes
Direct Quote: cost of one unit of foreign currency is given in units of local currency
1USD = Rs 73.48 or Rs 73.48 = 1USD
Indirect Quote: cost of one unit of local currency is given in units of foreign currency
Rs 1 = USD 0.014 or USD 0.014 = Rs 1

3. Lets begin with simple examples
Your local currency is EUR:
1USD = 0.92819 EUR & 1EUR = 1.08238 USD
Identify which is Direct ad Indirect Quote
Ans: Direct exchange rate: 1USD = 0.92819 EUR
Indirect exchange rate: 1EUR = 1.08238 USD

4. Few More to go..
LC = INR
Rs 75.40 = 1 USD
What if LC is USD for the above quote?

5. Two Way Quotation
Typically, the quotation in the interbank market is a two – way quotation. It means the rate quoted
by the market maker will indicate two prices. One at which it is willing to buy the foreign
currency, and the other at which it is willing to sell the foreign currency.
For example, a Mumbai bank may quote its rate for US dollar as under
USD 1 = Rs 48.1525/1650
More often, the rate would be quoted as 1525/1650 since the players in the market are expected to
know the “big number” i.e., Rs 48. In the given quotation, one rate is Rs.48.1525 per dollar and
the other rate is Rs.48.1650. per dollar.

6. Cross Currency Rate
currency exchange rate between two currencies when neither are the official currencies of the
country in which the exchange rate quote is given.
Example:
Suppose the Canadian dollar is currently traded at C$ 1.40/$. The Deutsche mark is traded at DM
1.39/$. Ignoring transaction costs. Determine the C$/DM exchange rate consistent with these
direct quotations.

7. Some More..
Original Exchange Rate Reciprocal Rate Answer
€1 = US$0.8420 US$ 1 = ? €
£1 = US$1.4565 US$1 = £ ?
NZ$1 = US$0.4250 US$ 1 = ? NZ$

8. A lil twisted..
As at 27 December 2012, the exchange rate between Euro and US dollar is €0.75 per US$.
Exchange rate between US$ and Swiss Franc is 1.09 US$ per Swiss Franc.
1 USD = 0.75 Euro
1.09USD = ?Euro
Find the same exchange rate between Euro and Swiss Franc in € per Swiss Franc and Swiss Franc
per Euro.

9. Solution..
 1 USD = 0.75 Euro (given) and 1.09 USD = 1 Swiss Frank (given)
Can we say,
if, 1 USD = 0.75 Euro then, 1.09USD = ? Euro (0.8175)
thus 1.09 USD = 0.8175 Euro = 1 Swiss Frank
 1 USD = 0.75 Euro (given) and 1.09 USD = 1 Swiss Frank (given)
Can we say,
if 1 Swiss Frank = 1.09 USD then 1.09USD = ? Swiss Frank (1.2232)

10. Realised Profit / Loss
• Calculate the realized profit or loss as an amount in dollars when C8,540,000 are purchased at a
rate of C1 = $1.4870 and sold at a rate of C1 = $1.4675.
Realised profit = Proceeds of sale of Crowns - Cost of purchase of Crowns
Solution: = (C8540000 * $1.4675) – (C8540000 * 1.4870$)
= 12532450 - 12698980
= USD 166530

11. Unrealized Profit / Loss
Calculate the unrealized profit or loss on Philippine pesos 20,000,000 which were purchased at a
rate of US$1 = PHP47.2000 and could now be sold at a rate of US$1 = PHP50.6000.
Unrealised profit = Proceeds of potential sale - Cost of purchase of pesos
Solution: = (20000000 / 50.6000) – (20000000 / 47.2000)
= 395256.9170 – 423728.8136
= USD 28471.8966
P20000000
USD 1 = PHP47.2000 1USD = PHP50.6000
?$ = PHP 20000000 ?USD = PHP 20000000

12. Numerical on Transaction Risk
ABC Ltd. is a listed real estate development company in India, with significant operations in Delhi has an export exposure of
HKD 12,00,000 payable August 31, 2019. HKD is not directly quoted against Indian Rupee.
The current spot rates are:
INR/GBP = Rs 82.05
HKD/GBP = HKD 9.93
It is estimated that Hong Kong Dollar will depreciate to 10.89 level and Indian Rupee to depreciate against GBP to Rs 84.83.
Forward rates for August 2019 are INR/ GBP= Rs 86.33 & HKD /GBP = HKD 10.77
Required:
i. Calculate the expected loss, if the hedging is not done. How the position will change, if the firm takes forward cover?
ii. If the spot rates on August 31, 2019 are:
 INR/ GBP = Rs 82.09
 HKD /GBP = HKD 9.99

13. Lets understand the question
 In the given problem, forward hedge is considered by ABC Ltd which is situated in India.
Hence all the answers will be calculated in INR
 Cross Currency Rate are provided. Hence, we need to find the exchange rate between the
desired pair-currency. INR & HKD. GBP is vehicle currency.
Facts of numerical:
 Expected receipt on 31st August 2019 = HKD 12,00,000
 The Current Spot Rates: INR/GBP = Rs 82.05 & HKD/GBP = HKD 9.93
 Estimated Currency Depreciation: HKD/GBP = HKD 10.89 & INR/GBP = Rs 84.83
 Forward Rates: INR/GBP = Rs 86.33 & HKD/GBP = HKD10.77

14. a. Calculate Expected Loss, if Hedging isn’t
done.
Particulars (without Hedging) Amount (Rs)
Value of export at the time of export (HKD12,00,000 * Rs 8.2628)
Spot Rate: INR/HKD = ?
1GBP = Rs 82.05 = HKD 9.93
if HKD9.93 = Rs 82.05
then HKD 1 = ?INR (Rs 8.2628)
-> Spot Rate on date of export 1HKD = Rs 8.2628
9915360
Receipts in August (with expected Depreciation) (HKD1200,000 * Rs 7.7897)
1GBP = rs 84.83 = HKD 10.89
1HKD = ?INR (Rs 7.7897)
Future Rate in August 1HKD = Rs 7.7897
9347640
Loss to the Exporter 567720
It means, the company at the time of export thought to receive Rs 9915360 but since the transaction was not hedged and due
to rupee depreciation, the company will now receive Rs 9347640 only. i.e, Rs567720 less than what expected at the time of
EXPORT

15. a. How the position will change, if the
firm takes forward cover?
Particulars (with Hedging) Amount (Rs)
Expected receipt at the time of export (HKD12,00,000 * Rs 8.2628)
Spot Rate: INR/HKD = ?
1GBP = Rs 82.05 = HKD 9.93
if HKD9.93 = Rs 82.05
then HKD 1 = ?INR (Rs 8.2628)
-> Spot Rate on date of export 1HKD = Rs 8.2628
9915360
Receipt if transaction is hedged (HKD12,00,000 * Rs 8.0158)
INR/ GBP= Rs 86.33 & HKD /GBP = HKD 10.77 => 1GBP = Rs86.33 = HKD10.77
If HKD10.77 = Rs86.33 then 1HKD = ? Rs
1HKD = Rs 8.01578 or Rs 8.0158
9618960
Loss to the Exporter 296400
Without hedge Loss = Rs567720 & with hedge the Loss is Rs 296400. It means loss of Rs 271320 can reduced if
hedged. Therefore , hedging is suggested.

16. b) If the spot rates on August 31, 2019 are:
INR/GBP = Rs 82.09 & HKD/GBP = HKD 9.99
Again Indirect quote is available: 1GBP = Rs 82.09 = HKD 9.99
HKD9.99 = Rs 82.09
therefore, 1HKD = Rs 8.2172
Particulars Amount (Rs)
Expected receipt at the time of export 9915360
Receipt after change in spot rates (HKD 12,00,000 * Rs 8.2172) 9860640
Loss to the Exporter 54720

17. Numerical on Transaction Risk
Ford India Private Limited is a wholly owned subsidiary of the Ford Motor Company in India.
The vehicles and engines use as an integral parts import from Ford Motor Company of Canada
Ltd. And the Ford Motor Company of Canada Ltd. invoiced the sales to the Indian company, the
payment being due three months from the date of invoice.
The invoice amount is $ 11,250 and at todays spot rate of $0.015 per Rs 1, is equivalent to Rs
7,50,000.
It is anticipated that the exchange rate will decline by 10% over the three months period and in
order to protect the dollar proceeds, the importer proposes to take appropriate action through
foreign exchange market. The three months forward rate is quoted as $0.0145 per Rs1.
You are required to calculate the expected loss and to show, how it can be hedged by forward
contract.

18. Expected loss calculation:
Particulars Amount (Rs)
Cost of Import or payment at the time of import (given) 750000.0000
Invoiced value after anticipated decline in exchange rate ($11250 * $0.0135)
Current Spot Rate: $0.015 = Rs 1 (Indirect quote)
Decline by 10% = Current Rate – (10% * Current Rate)
= 0.015$ - (0.10 * 0.015) = 0.015$ - 0.0015 = 0.0135
Therefore, Rs 1 = $0.0135
833333.3333
Loss to Ford Motor Company in India 83333.3333

19. Hedged by forward contract
Particulars Amount (Rs)
Cost of Import or payment at the time of import (given) 750000.0000
Expected payment if 3 months hedge considered
three months forward rate is quoted as $0.0145 = Rs1
Therefore, ($11250 / $0.0145)
775862.0690
Expected Loss to Ford Motor Company in India 25862.0690
Without hedge Loss suffered = Rs 83333.3333.
With hedge Loss Suffered = Rs 25862.0690.
It means Rs 54471.2643 loss can be covered if hedged.

20. And.. A Mini Case (your explanation may differ
but the calculation will be same)
Airbus’ Dollar Exposure
Airbus sold an aircraft, A400, to Delta Airlines, a U.S. company, and billed $30 million payable in six months.
Airbus is concerned with the euro proceeds from international sales and would like to control exchange risk. The
current spot exchange rate is $1.05/€ and six-month forward exchange rate 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 the U.S.
a) Compute the guaranteed euro proceeds from the American 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 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.
d) At what future spot exchange rate do you think Airbus will be indifferent between the option and money
market hedge?

21. Points to remember..
Current Spot Rate: 1Euro = $1.05
6months forward exchange rate: 1Euro = $1.10
6months put option on USD with strike price: 1$ = euro 0.95
6months interest rate in the Euro Zone = 2.5%
6months interest rate in the USA = 3%
Airbus wants € not $. Airbus the LC is Euro

22. a. Compute the guaranteed euro proceeds from the
American sale if Airbus decides to hedge using a
forward contract.
So here we need to calculate TOTAL RECEIPTS Airbus will receive with FORWARD COVER.
Total invoice = $30,000,000
Forward Rate: $1.10 = Euro 1
If 1 Euro = $1.10
Then ??Euro = $30,000,000
Euro 27272727.2727

23. b. If Airbus decides to hedge using money market instruments,
what action does Airbus need to take? What would be the
guaranteed euro proceeds from the American sale in this case?
Airbus will borrow the PRESENT VALUE of the $ receivable
FR = SR * [1+ (Dr * T)]
[1+(Fr *T)]
FR = $1.0474
$30000000 = $28642352.4918
Airbus want currency denomination in Euro and not in $. Therefore , Airbus will exchange
$28642352.4918 with SPOT RATE
$1.05 = Euro 1
= Euro 27278430.9445 = Guaranteed proceeds

24. 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.
We are required to calculate FUTURE SPOT RATE
6months forward exchange rate: $ 1.10 = Euro 1 (indirect Quote)
$ 1 = ? Euro (0.90909 or 0.9091)
0.9091 Euro is the expected FUTURE SPOT RATE
FUTURE SPOT RATE Vs STRIKE PRICE
0.9091Euro vs 0.95 Euro
It means ,FST < Strike Price

25. If Airbus uses PUT OPTION
$ 1 = Euro 0.95
$ 30 million = Euro 28500000
Euro 28500000 is the GROSS RECEIPTS
Premium : 1$ =0.02Euro
$ 30 m = Euro 600000
Also , Interest Rate (6m,onths) in Euro Zone = 2.5% or 0.025 => 1+0.025 = 1.025
Therefore , after 6m,onth the value of Euro 600000 = Euro 615000 (600000*1.025)
NET RECEIPT Airbus will get = Gross Receipts – FV of premium,,,,,
28500000 – 615000
= Euro 27885000