Contractual Exposure: Aeroflot and the Russian Ruble

1. What are the realistically available alternatives for Aeroflot to make payment?

The realistically available alternatives for Aeroflot to make payment other than airline services revenue are to promotion of tourism and revenue generated from the oil industry in Russia. Company can earn revenue through investing in the energy sector as it is one of the most important sector in the Russia.

1. Which is the best strategy to minimize Aeroflot’s expected expense for making the final payment?

The best strategy to minimize the expected expense is to increase the time span as a result of this company will have to pay relatively less amount in the final payment. Furthermore, Aeroflot can renegotiate the contract and discount options to cut cost and expense that will reduce final payment.

1. Suppose Aeroflot decided

• Consequences

As a result of depreciation in the value of RUB Aeroflot company will face financial issues. If they are earning in RUB but they have to make payment to the Boeing order in USD then company will have to pay more RUBs as a result of depreciation.

• Options

According to the given scenario Aeroflot has three key options to meet its obligations that are presented below:

Highest expected rate RUB 35/USD

Most likely rate RUB 31.50/USD

Lowest expected rate RUB 29/USD

• Optimal hedging strategy

The optimal hedging strategy represents the ratio of assets and liabilities. In accordance to this assets of company are less than liabilities that indicate that company is following negative optimal hedging strategy.

1. Recommendation

In this situation I would recommend to the Aeroflot Company to rethink about the purchases. In case of weak ruble or recession company will face decrease in their revenue that result in the decrease of affordability of the company to purchase new assets. Company should make purchases when their chances that company can earn more revenue or ensure profitability through purchasing new assets.