Remaining uncovered is the maximum risk approach. Choosing to hedge half the exposure when he expected the dollar to fall. This is obviously a sizeable level of risk for any firm to carry. The money market hedge works exactly like a forward hedge and I think we have narrowed the alternatives down to the forward hedge.
The put option provides the lowest all in cost if exercised but at the same it also provides the highest cost when not exercised. Germany, as well as the other major European Economic Community countries, has a vested interest in the manufacture of large long-distance civil aircraft.
If the exchange rate were to drop to DM2.
Exhibit 1 illustrates the final net cost of the first four alternatives over a range of potential end-of-period spot exchange rates. But it can be hard to predict future exchange rates and that is why a lot of companies choose to drive safe by ensuring their future financial situation through hedging.
What is the resulting position and cost for Ruhnau if instead the dollar increases to DM4. Purchasing the Boeing aircraft at the wrong time. Lufthansa did have inflows of U.
This case was prepared by Professor Michael H. Moffett for the purpose of classroom discussion only, and not to indicate either effective or ineffective management. Although Herr Ruhnau thought briefly about matching these U. Choosing to use forward contracts as his hedging tool instead of options.Lufthansa case study.
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Using an example, discuss the possible effect of hedging on a firm’s tax obligations. Answer: One can use an example similar to the one presented in the chapter.
Lufthansa - Hedging Alternatives. Executive Summary Lufthansa CEO Herr Ruhnau was under-fired for his hedging decision on the purchase of 20 Boeing aircrafts which cost Lufthansa an additional DM M back in Jan.
Some criticisms are valid to a certain degree given the strict covenants and guidelines Ruhnau had to work against however. When do the alternative hedging approaches produce the same result? Answer: Hedging transaction exposure by a forward contract is achieved by selling or buying foreign currency receivables or payables forward.
Should the Board of Lufthansa retain Heinz Ruhnau as chairman? Should Ruhnau justify his actions? 2. Do you think Heinz Ruhnau's hedging strategy made sense?
• In order to evaluate the hedging strategy, show the results for all the hedging alternatives – uncovered, full forward cover, partial forward cover, currency option, and money.
Evaluation of Hedging Alternatives Ruhnau identified five possible strategies to mitigate the potential foreign exchange risk that Lufthansa was facing.
The five alternatives were as follows: 1. Remain uncovered and see where the exchange is like in January 2.Download