Question

RE: Airbus and the Euro Airbus (French company) prices planes in dollars. This means depreciation of US$ squeeze profits because Airbus had to convert US$ into Euro. In order to protect business performance, the company fully hedged its dollar exposure in 2005 and mostly hedged for 2006. True or False?

Answer 1

Answer: True

Explanation: Hedging is the use of financial instruments or strategies to offset the risk of unfavourable price movements, it is mostly a technique by which potential losses are reduced or managed and not one to make money. Exposure in business is the level of uncertainty businesses involved in international trade face specifically the risk that currency exchange rates will fluctuate after a firm has already undertaken a financial obligation which may lead to huge losses.

One way to limit said exposure is by hedging. When the dollar dropped against the euro, Airbus's costs rose in proportion to its revenue but it didn't panic because it had fully hedged its dollar exposure through 2005 and had mostly hedged for 2006.