Lufthansa Case

Lufthansa Case

The owner of Lufthansa, Heinz Ruhnau, has a vital business decision to make: to purchase foreign goods now, later, or a combination of both. His options are straightforward in a financial and timely manner, but the decision can mean millions towards the company's bottom line. In this situation, the best route to take towards buying American goods would be option number three, using a foreign currency put option.

In this plan, the company stands to pay, at most, the equivalent of $1.6 billion dollars in German DM for their new planes. If the exchange rate between $/DM increases to a level higher than the current spot rate, then Ruhnau can stand to save significantly over the other choices by exercising a currency put option.

The first option lacks assurance and is too exposed to a volatile international currency market. Ruhnau's company has been too successful as of late to expose itself to such uncertainty. The second options does not account for a potential drop in the exchange rate, thereby losing the gains that would have been captured by option three. The fourth option of investing money for a year and then using that principal plus interest gains to purchase the planes is less desirable than the third option, too. The gains made in the investment would not cover a significant portion of the total costs (9.5625% versus potentially 25% if the exchange rate fluctuates drastically).

All in all, Ruhnau's best plan of action would be to find a broker from whom to buy a put option in dollars and deutschmarks and enjoy movements in the exchange rate in either direction.

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