Luthansa Case Study - Lufthansa Case Study Table of...

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Lufthansa Case Study
Table of Contents Brief Summary Case Overview Evaluation of Hedging Alternatives Case Questions: Mistakes Conclusion
Brief Summary Herr Heinza Ruhnau was CEO of Lufthansa up until 1986 when he was then fired from the company. Prior to his termination Herr Ruhnau made a hedging decision to purchase 737 Boeing jets for $500 million. The end result was a loss for Lufthansa. The board believed that Ruhnau was recklessly speculating and misused Lufthansa’s money. This case analysis will look into the mistakes that Ruhnau was accused of making and conclude with a justified decision of whether he should have been fired. Case Overview January 1985, Chairman of Lufthansa Herr Ruhnau made a purchase of twenty Boeing 737 jets at a total of $500,000,000 payable in U.S dollars on delivery January 1986. The Jan. 1985, conversion rate was at DM 3.2/$. Although the dollar was on the rise Herr Ruhnau believed that the direction of the direction of the exchange rate would change. Ruhnau’s view was that the dollar had reached its temporary pinnacle. His view was in line with what many thought at the time. Ruhnau had several financial hedging options to minimize Lufthansa’s foreign exchange exposure risk. o The hedging alternatives were: Remaining uncovered Cover the exposure with forward contracts Partial cover of exposure Or obtain U.S dollars holding them until payment Company guidelines however limited Ruhnau’s hedging options due to the affect they might have on the balance sheet of the company. . Evaluation of Hedging Alternatives 1. Uncovered: The Maximum Risk Option The uncovered option is represented on Exhibit 1 as the steepest line. It presents the biggest reward and simultaneously the biggest risk. If the DM/$ were to depreciate to 2.2 (in billions) the DM purchase would be 1.1, on the other hand appreciation displayed

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