THis question is quite challenging.....it's from CFA/FRM sample questionsA European airline has lease a new jumbo jet from US valued at $200 millions. The funding is with 6-month USD Libor. The airline has exposure to jet fuel and USD Libor volatility.(a) Does the airline have EUR/USD exposure?(b) Show how the airline can hedge its USD Libor exposure. Suggest two ways of doing this.(c) Discuss how exposure to jet fuel costs can be hedged. Suggest two ways of doing this. (d) Now conside USD-cap. THis instrument is expensive. How can you reduce its cost by adding a proper barrier that pplies to jet fuel prices.

(a) only if taxes are paid in EUR and company based in Europe (b) Swaps and Caps(c) same(d) Cap on Libor , down and Out on Jet but this would be both extremely dangerous and not something an airline company would consider seriously. Corr is likely going to be zero, and now is Libor explodes, the hedge does too if Jet goes down. One can argue this is then a good event...for a bad one.