Suppose the expected spot rate in 180 days is $0.67/SFr, with a most likely range of $0.64 to $0.70/SFr. Should American hedge?
American Airlines is trying to decide how to go about hedging SFr70 million in ticket sales receivable in 180 days. Suppose it faces the following exchange and interest rates.
Spot rate:
$0.6433-42/SFr
Forward rate (180 days):
$0.6578-99/SFr
Swiss Franc 180-day interest rate (annualized):
‘4.01%-3.97%
U.S. dollar 180-day interest rate (annualized):
8.01%-7.98%
a. What is the hedged value of American’s ticket sales using a forward market hedge?
b. What is the hedged value of American’s ticket sales using a money market hedge? Assume the first interest rate is the rate at which money can be borrowed and the second one the rate at which it can be lent.
c. Which hedge is less expensive?
d. Is there an arbitrage opportunity here?
e. Suppose the expected spot rate in 180 days is $0.67/SFr, with a most likely range of $0.64 to $0.70/SFr. Should American hedge? What factors should enter into its decision?