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. What is the hedged value of American's ticket sales using a forward market hedge

46,046,000

Explanation:

A hedge is an investment that protects your finances from a risky situation. Hedging is done to minimize or offset the chance that your assets will lose value. It also limits your loss to a known amount if the asset does lose value. It's similar to home insurance. You pay a fixed amount each month. If a fire wipes out all the value of your home, your loss is the only the known amount of the deductible

DATA

Forward rate (180 days) = $ 0.6578 / Sfr

Amount to hedge = SFr =  70,000,000

Solution

So using Forwards, American Airlines can lock in or hedge a value of 70000000 * 0.6578 = 46,046,000

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