International Finance Report: British Airways Purchase Decision

This report analyzes the currency risk faced by British Airways when purchasing Boeing 787 airplanes from the US manufacturer. The report focuses on the fluctuations in the USD/GBP exchange rate and their potential impact on the purchase price. It provides an overview of currency exposure, examining historical data to highlight the volatility of the currency market. The report recommends hedging strategies, specifically forward contracts and money market hedges, to mitigate the financial risks associated with currency fluctuations. Detailed calculations and comparisons of these hedging instruments are provided, along with a discussion of the differences between speculation and hedging, and an overview of operational hedging. The report concludes with an assessment of the effectiveness of the recommended strategies in minimizing financial losses and protecting the airline's financial performance.

Running head: INTERNATIONAL FINANCE
International Finance
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Table of Contents
Acquisition analysis of Possum Ltd:...............................................................................................2

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1. Introduction:
The assessment highlights the hedging measures than needs to be taken by the mangers of
British Airways for minimising the risk from currency fluctuations. The case study directly
highlights that the British Airways has an intention of buying the Boeing 787 Airplanes from the
US manufacturer to support its operations. The deal is commended in February 2019, where the
payments will be made at the time of delivery, which is one year from the date of signing the
deal. The fluctuation in the currency market will directly have negative impact on the purchase
price of British Airways, which needs to be hedged with adequate financial instruments. Hence,
the managers of the organisation need to acquire adequate hedging strategy for minimising the
negative impact from volatile capital market. Moreover, the assessment also evaluates currency
exposure overview of the current situation. In addition, the analysis of hedging measure and
speculations is mainly evaluated in the assessment, which can eventually help in detecting the
risk levels faced by the organisation. The adequate explanation about the operational hedge is
also depicted in the assessment, which could have affected the deal of British Airways. The
analysis on the currency fluctuations is also detected, which can increase the cost buying the
Airplane for British Airways.

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2. Analysis/Findings:
2.1 Currency exposure overview:
Figure 1: Currency valuation of USD/GBP
(Source: )
The deal made by British Airways with the US manufacturing company is commenced in
USD currency, where the organisation needs to pay its supplier in US dollars for the airplanes.
British Airways mainly deals in GBP, where the organisation needs to convert the GBP to USD
for conducing the relevant payments. However, the payments need to be conducted in one-year
time from the actual deal, which will have negative impact on the purchase price of the aircraft,
as the currency market has been highly volitively. The above figure highlights the change in

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currency valuation of USD/GBP over the period of two years. This historical data directly
indicates that the price fluctuations of USD/GBP has witnessed a high of £0.82266 and a low of
£0.69730, while the currently values is at £0.75705. These fluctuations in the current currency
values might have negative impact on the deal, which in turn could raise the purchase price for
British Airways. The difference between the high and lows of two years directly raise concern
for British Airways, as the purchase price might fluctuate from £1.65 Billion to £1.39 Billion
respectively. () indicated that by using the hedging measure companies are able to mitigate the
risk from the currency market, which can negatively affect their revenues.
The major risk that is involved in the deal made by British Airways is the fluctuations in
the value of USD/GBP. In addition, the financial performance of the organisation is also linked
with the deal, as getting the airplanes at higher cost level due to the currency fluctuation will
negatively affect its financial performance. The alteration in past two years directly bears witness
to the fluctuations of the currency market, which can be mitigated with adequate hedging
instruments. The hedging strategies used for reducing the negative impact from currency market
are Forward contracts, Future contracts, Option contracts and Money market hedge. Moreover,
the forward contract fixes the time and rate of exchange in which the GBP will be converted to
USD. The option contract allows the investor to hedge their currency exposure by buying the call
or put options. The future contracts are bought and sold for curbing the risk that is projected by
the currency market. In addition, the money market hedge is completed with the help of bankers,
who provide information regarding the interest rate that helps in reducing the risk from currency
market.

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2.2 Hedging recommendation:500
There are different hedging strategies that can be adopted by British Airways for
minimising the negative impact of currency fluctuations and safe guard its expenses. From the
evaluation, it is detected that hedging instruments such as British Airways can use Forward
Contract and Money Market Hedge for minimising the loss incurred from the purchase of Boeing
787 airplanes. In this context, () mentioned that companies by deploying hedging strategies are
able to protect the investments from the volatile currency market. The forward contract provides
information regarding the measures that can be used for mitigating the risk. On the other hand,
the money market hedge requires additional effort, where the loans and deposit from different
countries is required.
Forward Contract
Particulars Value
USD/GBP 0.757
Interest rate UK 0.75%
Interest rate US 2.50%
Forward contract rate 0.744
Forward Contract value £ 1,48,82,49,512.20
Current Value £ 1,51,41,00,000.00
Savings on purchase £ 2,58,50,487.80
The above table provides information regarding the forward contract, which can be used
by British Airways for minimising the negative impact on its purchase of Airplanes after 1 year.
The forward contract is estimated to use the calculation of interest rate of UK and US. This
directly states that in one-year time the currency conversion rate of the decline during the
difference in the interest rates of both UK and US. The forward contract is used by the
organisation for detecting the level of .

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Money Market Hedge
Particulars Value
Deposit rate US 2.70%
Loan rate UK 9.90%
Deposit amount in US $ 1,94,74,19,668.94
Current rate £ 0.75705
Loan from UK bank £ 1,47,42,94,060.37
Interest Payment £ 14,59,55,111.98
Total amount paid to bank £ 1,62,02,49,172.35
Current value £ 1,51,41,00,000.00
Loss on purchase price $ 10,61,49,172.35
2.3 Speculation vs Hedging:300
2.4 Operational Hedge:400
Conclusion:200

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