United States Dollar
Lufthansa
Lufthansa
Lufthansa
In January 1985, a German company that uses Deutschmarks made a large purchase from a U.S. company that uses U.S. dollars, and needed to evaluate the best hedging alternatives to secure the least possible cost. The Chairman of Lufthansa, Herr Heinz Ruhnau, purchased twenty 737 jets from Boeing. The total purchase price was $500,000,000, which was payable in U.S. dollars on delivery of the aircrafts in one year.
Chairman Ruhnau chose a partial cover by hedging 50% of the exposure with forward contracts, which was $250 million at the one year forward rate of DM3.2/$. He left the remaining 50% ($250 million) uncovered.
Due to this decision, Lufthansa paid DM225,000,000 more than if Ruhnau would have chosen to not hedge at all or DM196,000,000 if he chose the put option. The Board of Directors is going to determine whether Ruhnau should be kept on as Chairman or be terminated.
1) Timing of Boeing Purchase
Purchasing the Boeing aircraft at the wrong time. The U.S. dollar was at an all-time high at the time of the purchase, in January of 1985.
Board of Director’s Perspective
In January 1985, the Board of Directors believed Ruhnau purchased the aircrafts at the wrong time since the U.S. dollar was at an all-time high, which was DM3.2/$. Ruhnau and many others at the time believed the U.S. dollar had reached its max and would start its decline. The U.S. dollar dropped to DM2.3/$ when payment was due one year later.
The Board understands the difficulty to determine future currency exchange rates, even when using different forecasting techniques there is no guarantee to predict accurate future exchange rates. However, Ruhnau and many others believed the U.S. dollar would depreciate.
The Board also questions Ruhnau about the necessity of these aircrafts, the timing of purchase, and the purchase price agreed upon. * Does Lufthansa really need the aircrafts at this time? Why are they being purchased? * If they are
Lufthansa
Lufthansa
In January 1985, a German company that uses Deutschmarks made a large purchase from a U.S. company that uses U.S. dollars, and needed to evaluate the best hedging alternatives to secure the least possible cost. The Chairman of Lufthansa, Herr Heinz Ruhnau, purchased twenty 737 jets from Boeing. The total purchase price was $500,000,000, which was payable in U.S. dollars on delivery of the aircrafts in one year.
Chairman Ruhnau chose a partial cover by hedging 50% of the exposure with forward contracts, which was $250 million at the one year forward rate of DM3.2/$. He left the remaining 50% ($250 million) uncovered.
Due to this decision, Lufthansa paid DM225,000,000 more than if Ruhnau would have chosen to not hedge at all or DM196,000,000 if he chose the put option. The Board of Directors is going to determine whether Ruhnau should be kept on as Chairman or be terminated.
1) Timing of Boeing Purchase
Purchasing the Boeing aircraft at the wrong time. The U.S. dollar was at an all-time high at the time of the purchase, in January of 1985.
Board of Director’s Perspective
In January 1985, the Board of Directors believed Ruhnau purchased the aircrafts at the wrong time since the U.S. dollar was at an all-time high, which was DM3.2/$. Ruhnau and many others at the time believed the U.S. dollar had reached its max and would start its decline. The U.S. dollar dropped to DM2.3/$ when payment was due one year later.
The Board understands the difficulty to determine future currency exchange rates, even when using different forecasting techniques there is no guarantee to predict accurate future exchange rates. However, Ruhnau and many others believed the U.S. dollar would depreciate.
The Board also questions Ruhnau about the necessity of these aircrafts, the timing of purchase, and the purchase price agreed upon. * Does Lufthansa really need the aircrafts at this time? Why are they being purchased? * If they are
References: History. (n.d.). Retrieved April 2, 2012, from http://www.lufthansa.com: http://konzern.lufthansa.com/en/history/eighties.html What about Germany? (n.d.). Retrieved April 9, 2012, from http://geert-hofstede.com: http://geert-hofstede.com/germany.html