Given these criticisms should the board of lufthansa retain herr heinz ruhnau as chairman

Sizeable level of risk for any firm to carry. Many firms believe the decision to leave a large exposure uncovered for a long period of time to be nothing other than currency speculation. The forward contract is entered into at the time the transaction exposure is created Lufthansa could lock-in an exchange rate of DM3. Cost of the Boeing s No risk or sensitivity to the ending spot exchange rate.

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.

Given these criticisms should the board of lufthansa retain herr heinz ruhnau as chairman

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.

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.

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 rolled around.

But then again, it really wasn't his money to gamble with. Evaluation of the Hedging Alternatives Lufthansa and Herr Ruhnau had the same basic hedging alternatives available to all firms: Remain uncovered, Cover the entire exposure with forward contracts, Cover some proportion of the exposure, leaving the balance uncovered, Cover the exposure with foreign currency options, Obtain U.

Although the final expense of each alternative could not be known beforehand, each alternative's outcome could be simulated over a range of potential ending exchange rates. Exhibit 1 illustrates the final net cost of the first four alternatives over a range of potential end-of-period spot exchange rates.

This case was prepared by Professor Michael H. Moffett for the purpose of classroom discussion only, and not to indicate either effective or ineffective management.

EXHIBIT 1 Lufthansa's Net Cost by Hedging Alternative Of course one of the common methods of covering a foreign currency exposure for firms, which involves no use of financial contracts like forwards or options, is the matching of currency cash flows.

Given these criticisms should the board of lufthansa retain herr heinz ruhnau as chairman

Lufthansa did have inflows of U. Although Herr Ruhnau thought briefly about matching these U. Remaining uncovered is the maximum risk approach. It therefore represents the greatest potential benefits if the dollar weakens versus the Deutschemarkand the greatest potential cost if the dollar continues to strengthen versus the Deutschemark.

If the exchange rate were to drop to DM2. Of course if the dollar continued to appreciate, rising to perhaps DM4. The uncovered position's risk is therefore shown as that value-line which has the steepest slope covers the widest vertical distance in Exhibit 1.

This is obviously a sizeable level of risk for any firm to carry. Many firms believe the decision to leave a large exposure uncovered for a long period of time to be nothing other than currency speculation.Case Questions Given these criticisms, should the Board of Lufthansa retain Herr Heinz Ruhnau as Chairman?

How should Ruhnau justify his actions and so justify his further employment? Should the Board of Lufthansa retain Heinz Ruhnau as chairman? Should Ruhnau justify his actions? Given these criticisms, should the Board of Lufthansa retain Herr Heinz Ruhnau as Chairman? How should Ruhnau justify his actions and so justify his further employment?

A /5. Given these criticisms, should the Board of Lufthansa retain Herr Heinz Ruhnau as Chairman? How should Ruhnau justify his actions and so justify his further employment? Tutorials for this Question. Given These Criticisms Should The Board Of Lufthansa Retain Herr Heinz Ruhnau As Chairman 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.

Given these criticisms, should the Board of Lufthansa retain Herr Heinz Ruhnau as Chairman? How should Ruhnau justify his actions and so justify his further employment?

Expert's Answer

EXHIBIT 2 What Herr Ruhnau Could See: The Rise 4 A It is important to understand what Herr Ruhnau would be hoping to happen if he had decided to purchase the put options. It was February 14, , 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 .

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