Lufthansa hedging alternatives

lufthansa case study pdf

This conclusion was drawn by comparing the price of the fully hedged option strategy, DM1, million, to the DM1, million price of his strategy of hedging 50 per cent of the price through the forward market. Forward contract — this would lock-in the purchase price in DM terms with no required upfront payment.

If Ruhnau would have not hedged, even as he saw the U. Which alternative would you choose and why?

Germany, as well as other major European economic community countries, has a vested interest in the joint venture Airbus. However, it has real meaning in many boardrooms even today. Money market hedge — this would lock in the purchase price and should be identical to the full forward hedge. In this case, this is not a viable alternative due to the need to borrow U. Would there have been affects to the purchase price due to changes in the airline industry? The recommendations may have instructed him to take a full forward cover because of the strong and steady rise of the U. The Board would like Ruhnau to explain the thinking behind his course of action. That would have contributed significantly to the amount of losses, adding DM50,, to total DM cost to the partial forward cover. An industry analysis of. This would suggest this imbalance between supply and demand may continue. The aircrafts could have been a necessary purchase to replace aging planes which may not have been able to keep up with their current flight offerings. If Lufthansa needed to adopt a risk adverse strategy they could have fully eliminated its currency exposure through the purchase of forward contracts for the entire US dollar amount of the purchase. Instead of depending on just passenger traffic, discounted tickets, and occupancy, they need to streamline operations and look at non-airfare revenue.

Its official policy was to have half Boeing and half Airbus aircraft, so it needed to purchase some aircraft from Boeing to offset its pending purchase of aircraft from Airbus.

Consider both fully hedging the cost and hedging exactly one half of the cost.

Due to Lufthansa's recent growth, it needed new aircraft. In this exhibit we can see the hedging characteristics of each of the alternatives. Many signs such as the current interest rate differential between the US and Germany indicate that the value of the USD might continue to rise. To blame the Chairman solely when many have contributed their analysis to make this decision is unreasonable. Instead of depending on just passenger traffic, discounted tickets, and occupancy, they need to streamline operations and look at non-airfare revenue. Ruhnau should have continued with his original expectation and waited until the value of the dollar decreased. Leadership is also challenged, and the acceptance of decisions relies on expertise What about Germany? However, Ruhnau still reduced the risk.

Ruhnau was wise and knowledgeable enough to know to not go with his instincts because this money belonged to Lufthansa and the stakeholders. The goal is to introduce students to the most common methods of hedging foreign exchange FX risk.

Discuss the risk exposure of Amarnath hedge fund. Solution Summary This solution is comprised of a detailed explanation to answer the request of the assignment of more than 2, words of text.

Ruhnau should have purchased put options. Additionally, it was unlikely that the dollar was to escalate meaning Ruhnau had significantly reduced the foreign exchange risk of the final Deutsche Mark required over a range of final values.

Lufthansa hedging alternatives

The total cost of the purchase in the event the put was exercised would be DM 1. One month later, the U.

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Lufthansa: To Hedge or Not To Hedge