FX Risk Hedging at EADS Harvard Case Solution & Analysis

FX Risk Hedging at EADS

Problem Diagnosis

The management of the Space and European Aeronautic Defense Company which owned the Airbus was faced with one of the foreign exchange exposure in the year 2008. The exposure had been faced by the management of the company in the year 2006 and finally the management had decided to take an action in order to mitigate this risk. The issues were basically due to the exchange rate fluctuations which was causing a mismatch between the manufacturing payments and the revenues of the company.

fx risk hedging at eads case solution

fx risk hedging at eads case solution

The company received its revenues in dollars whereas the company paid for the manufacturing costs in Euro. Foreign exchange risk had also been faced by the company by entering into forward contracts as the exposure was low however, as the number of the transactions started to increase therefore, the management of the company thought to change the policy followed by the company in the past and also consider other alternative hedging instruments such as the options as the exchange rates were highly unfavorable for the company.

However, before making a final decision all the factors need to be considered as the change in the policy would have significant impacts upon the profitability, long term investments and the cash flows of EAD. The Airbus owned by EADS Company is competing with Boeing in the duopoly market and in order to remain competitive against the rivals measuring the foreign exchange exposure and analyzing the rationale for EAD for hedging FX risk is crucial at this point.

The impact of the new policy changes will have to be evaluated qualitatively and quantitatively however, before that an analysis of the current situation faced by the company has been performed..................

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