Lufthansa Purchase Of Boeing 737

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Lufthansa Purchase of Boeing 737 1. Do you think Heinz Ruhnau´s hedging strategy made sense? Although Ruhnau was right with his assessment that the dollar was overvalued, the decision he made to manage the position was not really effective, even though he didn´t want to cover for the position at all. By hedging half of the $500 million, he basically divided the risk in half, hedging one half and leaving one half uncovered. The result of this decision was that the resulting positions would have changed direction in their valuation as the exchange rate moved in either direction. | |Half covered / half uncovered |Fully covered |No coverage | |Calculation |$250,000,000*3.2DM/$ |$500,000,000*3.2DM/$ |500,000,000*2.3DM/$ | | |+ | | | | |250,000,000*2.3DM/$ | | | |Total |$1,375,000,000 |$1,600,000,000 |$1,150,000,000 | As it can be seen from the table above, Ruhnau´s strategy indeed made sense. After all he should have done what he wanted to do, leave everything uncovered, but in this case he wouldn´t have had any safeguard against a rising dollar, which would have significantly increased the purchasing costs of the Boeing transaction in the worst case. Although Ruhnau would have saved 28% ($450 mil. from 1.6 bil.) leaving the whole amount uncovered he still would have had the highest risk, so by covering half of the purchase amount he still saved 14% ($225 mil. from 1.6 bil.)

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