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  • FX Risk Hedging at EADS

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    Alexandra Ermakova
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    EADS needs to hedge against foreign exchange risk because it competes in the aircraft market with Boeing, where transactions are quoted in dollars but it has euro-denominated costs. Currently, EADS uses a double-pronged strategy of operating decisions to minimize dollar inflows and derivatives contracts to transfer risk. Its Speed Grid approach determines weekly forward contract purchases to offset future dollar depreciation. EADS' estimated FX transaction exposure is $49.2 billion, or 53% of its $94.2 billion total exposure. Hedging with one-year options would cost around 13 million euros annually but provide more stable earnings than forwards alone.

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    EADS needs to hedge against foreign exchange risk because it competes in the aircraft market with Boeing, where transactions are quoted in dollars but it has euro-denominated costs. Currently, EADS uses a double-pronged strategy of operating decisions to minimize dollar inflows and derivatives contracts to transfer risk. Its Speed Grid approach determines weekly forward contract purchases to offset future dollar depreciation. EADS' estimated FX transaction exposure is $49.2 billion, or 53% of its $94.2 billion total exposure. Hedging with one-year options would cost around 13 million euros annually but provide more stable earnings than forwards alone.

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    434 views14 pages

    FX Risk Hedging at EADS

    Uploaded by

    Alexandra Ermakova
    EADS needs to hedge against foreign exchange risk because it competes in the aircraft market with Boeing, where transactions are quoted in dollars but it has euro-denominated costs. Currently, EADS uses a double-pronged strategy of operating decisions to minimize dollar inflows and derivatives contracts to transfer risk. Its Speed Grid approach determines weekly forward contract purchases to offset future dollar depreciation. EADS' estimated FX transaction exposure is $49.2 billion, or 53% of its $94.2 billion total exposure. Hedging with one-year options would cost around 13 million euros annually but provide more stable earnings than forwards alone.

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    of 14

    FX Risk Hedging

    at EADS

    ALEXANIAN Tom - DAHARE


    Likhendra - ERMAKOVA Aleksandra -
    TALBI Maria - ZHANG Yanran
    Why does EADS need
    to hedge against
    foreign exchange risk?
    01
    FX risk management is an issue of much
    concern for EADS
    It is competing in the duopoly
    01Dollar is the currency of commercial
    market with American Boeing
    03 Time lapse

    About 8 years between payment


    aircraft transactions, because of the commitments and actual cash receipt
    industry’s American origin and for the manufactured product.
    aircraft’s financing quoted in dollars

    Sales growth and dollar


    02 Euro denominated costs
    Every 10-cent movement in the
    04 depreciation
    Airbus had reported record order
    dollar-to-euro exchange rate intake, while the dollar had
    against us is a €1 billion EBIT depreciated from $1.20 per euro to
    impact $1.58 (every dollar in sales was now
    yielding 25% fewer euros)
    What is the current FX
    risk hedging strategy
    of EADS?
    02
    FX Risk Hedging:
    Double-pronged Strategy

    FX Risk Mitigation FX Risk Transfer

    -> Operating Decisions -> Derivative Contracts

    - Minimize expected net dollar inflows - Protect EBIT against dollar’s decline
    - Euro-denominated cost base into dollars - Stable future euro-denominated earnings
    - Restructuring Initiatives: - Time for adaptation of the cost structure
    “Power8 Program”
    Explain Speed Grid?
    03
    SPEED GRID
    Mechanical hedging approach

    ↳ Determines the amount of weekly FX forward contracts to purchase

    The mechanics
    Limitations
    ● Massive purchase of forward when $ goes up
    ● Gap between eligible exposure and the hedge book
    ● Low purchase of forward when $ goes down ● Over-Hedge

    Drivers
    ○ Lock in a level of $ prices
    ○ Offset future downward slope of The $

    ➥ Allows time diversification


    What is the estimated
    FX transaction
    exposure for EADS?
    04
    FX Transaction Exposure

    Total Exposure Total Hedge Book Total Transaction


    Exposure
    $94,237 Billions $44,746 Billions
    47% $49,167 Billions
    53%
    What is the estimated
    hedging cost for EADS
    if they use options?
    05
    Hedging cost For EADS
    Put option price
    Strike price
    0.0517 1.2500

    Total cost of hedging Price for one year premium (2009)


    2 Billion € 13 million €

    *If EADS wants to Hedge with Fx options they would need an amount sufficient to protect Airbus
    €291 billion ($460 billion).
    What are your
    recommendations?
    06
    Recommendations
    Buy one year Options to be updated every year Average cash-flow with forwards

    ● Temporary unstable FX market ● 4,5 billion euro


    ● EBIT > Premium ; avoid income loss
    ●
    Average cash-flow with options
    Return of the Option > Forward
    ● Possibility to sell the option ⇒ offset the premium
    ● 4,7 billion euro
    ● Natural hedge will have effect overtime
    Option premium in 2009

    ● 13 million euro
    Thank You For
    Your Attention

    ALEXANIAN Tom - DAHARE


    Likhendra - ERMAKOVA Aleksandra -
    TALBI Maria - ZHANG Yanran

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