Lufthansa
LUFTHANSA
If Karl Marx could see what the foreign exchange market is doing to the world’s captains of industry, he would surely be laughing. Not only do they put up with labor problems, competition, deregulation, and rapid changes in technology—no, that is not enough. Add currency volatility to that list in the last few years. And it’s so bad that a successful corporate executive of one of the world’s prestige airlines can put on a multimillion dollar currency speculation, and win—and still get lambasted by his critics. It’s enough to make a capitalist cry.
- Intermarket, 1985
It was February 14, 1986, and Herr Heinz Ruhnau, Chairman of Lufthansa (Germany) was summoned to meet with Lufthansa’s board. The board’s task was to determine if Herr Ruhnau’s term of office should be terminated. Herr Ruhnau had already been summoned by Germany’s transportation minister to explain his supposed speculative management of Lufthansa’s exposure in the purchase of Boeing aircraft. In January 1985 Lufthansa, under the chairmanship of Herr Heinz Ruhnau, purchased twenty
737 jets from Boeing (U.S.). The agreed upon price was $500,000,000, payable in U.S. dollars on delivery of the aircraft in one year, in January 1986. The U.S. dollar had been rising steadily and rapidly since 1980, and was approximately DM3.2/$ in January 1985. If the dollar were to continue to rise, the cost of the jet aircraft to Lufthansa would rise substantially by the time payment was due.
Herr Ruhnau had his own view or expectations regarding the direction of the exchange rate. Like many others at the time, he believed the dollar had risen about as far as it was going to go, and would probably fall by the time January 1986 rolled around. But then again, it really wasn’t his money to gamble with. He compromised. He sold half the exposure ($250,000,000) at a rate of DM3.2/$, and left the remaining half ($250,000,000) uncovered.
Evaluation of the Hedging Alternatives
Lufthansa and Herr
If Karl Marx could see what the foreign exchange market is doing to the world’s captains of industry, he would surely be laughing. Not only do they put up with labor problems, competition, deregulation, and rapid changes in technology—no, that is not enough. Add currency volatility to that list in the last few years. And it’s so bad that a successful corporate executive of one of the world’s prestige airlines can put on a multimillion dollar currency speculation, and win—and still get lambasted by his critics. It’s enough to make a capitalist cry.
- Intermarket, 1985
It was February 14, 1986, and Herr Heinz Ruhnau, Chairman of Lufthansa (Germany) was summoned to meet with Lufthansa’s board. The board’s task was to determine if Herr Ruhnau’s term of office should be terminated. Herr Ruhnau had already been summoned by Germany’s transportation minister to explain his supposed speculative management of Lufthansa’s exposure in the purchase of Boeing aircraft. In January 1985 Lufthansa, under the chairmanship of Herr Heinz Ruhnau, purchased twenty
737 jets from Boeing (U.S.). The agreed upon price was $500,000,000, payable in U.S. dollars on delivery of the aircraft in one year, in January 1986. The U.S. dollar had been rising steadily and rapidly since 1980, and was approximately DM3.2/$ in January 1985. If the dollar were to continue to rise, the cost of the jet aircraft to Lufthansa would rise substantially by the time payment was due.
Herr Ruhnau had his own view or expectations regarding the direction of the exchange rate. Like many others at the time, he believed the dollar had risen about as far as it was going to go, and would probably fall by the time January 1986 rolled around. But then again, it really wasn’t his money to gamble with. He compromised. He sold half the exposure ($250,000,000) at a rate of DM3.2/$, and left the remaining half ($250,000,000) uncovered.
Evaluation of the Hedging Alternatives
Lufthansa and Herr