...Jan. 19, 2011 Lufthansa Case Analysis Lufthansa’s chairman, Herr Heinz Ruhnau, purchased twenty 737 jets from Boeing (U.S.) in January 1985. The agreed price of the jets was $500,000,000 payable in one year. The U.S. dollars has been rising steadily and rapidly since 1980, and was about DM3.2/$ in January 1985 (Chart 1). Chart 1- DM/$ Exchange Rate 1980-1985 Herr Ruhnau believed U.S. dollar will depreciate very soon based on its appreciation in last 5 years. That is, exchange rate between DM and USD will favor Lufthansa when the company pays $500,000,000 to Boeing. However, it would be too risky to leave the whole amount uncovered. In order to hedge some risk, Herr Ruhnau used forward contract to cover 50% of the payment, and left the other 50% uncovered. There are five alternative hedging ways to choose: 1. Remain uncovered It is the maximum risk approach. If e= DM2.2/$ by January 1986, payment to Boeing would be DM= 2.2 * 500 million= DM 1.1 billion If e= DM 4/$ by January 1986, payment to Boeing would be DM= 4* 500 million= DM 2 billion 2. Full forward cover This approach would lock in an exchange rate of DM 3.2/$. Payment to Boeing would be DM= 3.2 * 500 million= DM 1.6 billion 3. Partial coverage Cover part of the payment with forward contract. Like Herr Ruhnau did, 50% covered by forward contract, DM= 3.2 * 250 million= 0.8 billion. If e= DM 2.2/$ in January 1986, total cost would be 0.8 billion + 2.2 * 250 million= DM 1.35 billion 4. Foreign...
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...Herr Heinz Ruhnau was the chairman of the German airline, Lufthansa. On February 14th, 1986 he faced losing his chairmanship over the partial hedging decision he made one year prior. The investment he made January 1985 was a purchase of seven hundred and thirty-seven jets from Boeing Aircrafts with an agreed upon cost of $500,000,000 due in one year. Ruhnau based his final hedging decision on the fact that the U.S dollar had been rising against the German Deutschmark at a fast pace over the previous five years. His instincts were that the U.S dollar was at its peak in 1985 and would decline over the next year. This expectation is what drove his executive decision to hedge half of the five hundred billion or $250,000,000 at the forward exchange rate of DM3.2/S and leave the other $250,000,000 completely uncovered. By the delivery date, Herr Ruhnau was correct in his assessment of the dollar to Deutschmark foreign exchange rate. Even though the dollar had depreciated he was still under scrutiny for, “recklessly speculating with Lufthansa’s money (3).” Background & Issues involved: Herr was summoned to meet with the Lufthansa board for the forward partial hedge and not for the $250,000,000 he left susceptible to foreign exposure risk. The board identified four main errors Herr made in the decision making process of acquiring those 737 jets: 1. Purchasing the Boeing aircraft at the wrong time. The U.S dollar was at an all-time high at the time of purchase in January 1985...
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...fLufthansa Case Study Herr Heinz Ruhnau decision to buy 20 airplanes from Boeing in 1985 for $500.000.000 was a mistake, so the Board of Lufthansa should fire him due to poor judgement. His strong feeling that the US exchange rate was going to drop, it wasn’t based on any evidence, so he should have postponed buying the planes until after the rate had actually dropped, in order to save company money. Regardless of the speculations that he had about the exchange rate, he should have put options on the money to save the company from higher losses if he’s intuition was not correct. There were 5 possible hedging alternatives. First was to remain uncovered, the riskiest option, which it depends on how the exchange rate will change in the coming year. In this case it would the the most profitable, but still a big risk to make such a decision. The second one was to apply a full forward cover which allows the company to buy forward contracts for the entire amount and eliminate the risk. In this case, Lufthansa pays $1.600.000.000 due to the current spot exchange rate and it doesn’t depend on how the rate would change. The third alternative was to buy Foreign Currency Options, this means to buy put options and let the expire, then purchase dollars for a lesser amount. This would have cost the company $1.246.000.000 and it would be the most profitable decision. The last alternative was to Buy Dollars Now which required the company to have all the money and hold them until the...
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...acción financiera que tomo en su entonces presidente Herr Ruhnau en el Enero del 1985. La acción era comprar una flota de 20 aviones tipo jet a Boeing por un monto de $500,000,000 pagaderos contra entrega en un lapso de un año. El dólar en su momento se encontraba en el mejor precio de la historia y se mantenía incrementando de esta manera el cambio en su momento (enero 1985) era de DM 3.2/$. Las opciones que tenía en su momento el Sr. Ruhnau, eran: 1. Permanecer al descubierto 2. Cubrir la exposición completa con contratos a plazos. 3. Cubrir una parte de la exposición y dejar el resto sin cubrir. 4. Obtener dólares en su momento y mantenerlos hasta que se deba efectuar el pago. El señor Ruhnao utilizo la opción 3, protegiendo el 50% de la inversión a DM3.2/$ y dejando el resto al incognito si sube o baja el cambio de DM/$. Para mala fortuna de Lufthansa y el señor Ruhnau sucedió lo que él pensaba que iba a suceder el dólar tenía que devaluarse y para enero del 1986 cuando tocaba hacer los pagos el cambio era de DM2.3/$ de esta manera los costos de las opciones eran los siguientes: Alternativas Tipo Relevante Costo total en DM 1. Descubierto DM 2.3/$ 1,150,000,000 2. Cobertura 100% DM 3.2/$ 1,600,000,000 3. Cobertura 50/50 ½ DM 2.3/$ + ½ DM 3.2/4 1,375,000,000 4. Compra de dólares cierre DM 3.2/$ 1,246,000,000 Viendo que en se nota que la acción del señor Ruhnau había ocasionado pérdidas a Lufthansa por 225,000...
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...¿Debe despedir el consejo de Lufthansa a Herr Heinz Ruhnau como presidente? ¿Cómo justificaría Ruhnau sus acciones y en consecuencia, como justificaría de no perder su trabajo? Considero que el Consejo no debería despedir a Herr Ruhna ya que actuó de manera racional para no poner en riesgo el capital de los accionistas. No creo el hecho de que Herr Ruhnau actuó solamente por instinto, aunque el caso no lo menciona, lo más seguro es que el realizó los respectivos análisis sobre que era más conveniente para la empresa. Considero que el cómo CEO de Lufthansa tomó la decisión más adecuada por la incertidumbre que existía en relación al tipo de cambio, lo más adecuado fue cubrir el riesgo proporcionalmente. Si bien es cierto que la proporción para la cobertura fue arbitraria, se intentó equilibrar el riesgo al 50% combinando una estrategia de cobertura con una estrategia especulativa, esperando resultados futuros. A pesar de la seguridad que el tenia no siguió irracionalmente sus proyecciones, ya que eran muy arriesgadas; lo cual no habría sido financieramente adecuado. La opción de permanecer descubierto era muy arriesgada, si bien es cierto las ganancias pudieron haber sido muchas, también las perdidas pudieron ser catastróficas en caso de que el dólar no se hubiese desplomado. Considero que al final las expectativas de Ruhnau fueron acertadas. El dólar cayó al año siguiente a DM2.3000/$ para enero de 1986. Lo más sorprendente fue la velocidad a la que se desplomo, por...
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