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.
2. Choosing the hedge half the exposure when he expected the dollar to fall. If he had gone through with his instincts, he would have left the whole amount unhedged.
3. Choosing to use forward contracts as his hedging tool instead of options. The purchase of put options would have allowed Herr Ruhnau to protect himself against adverse exchange rate movements while preserving the flexibility