Hedging mitigates potential losses and can be viewed as an insurance premium helping firms avoid steep currency losses. This alternative eliminates all currency exposure, but requires a high capital investment immediately.
The purchase of put options would have allowed Herr Ruhnau to protect himself against adverse exchange rate movements while preserving the flexibility of exchanging Deutschemarks for dollars spot if preferred.
Then the U. Ruhnau used this information as well as opinions, including his own, that the U. It would have been very unlikely and unreasonable for Lufthansa to generate such a large investment in a reasonable amount of time. Ruhnau evaluated the decision based on the information he had at the time.
Foreign Currency Put Options. References History. The US dollar was at a record high level at the time of purchase, which consequently increased the value of the Deutsche Mark required for payment in January The Board of Directors is going to determine whether Ruhnau should be kept on as Chairman or be terminated.
Buying a put option would have saved DM,However, if the value of the dollar depreciated as expected, Lufthansa would be able to let the option expire and purchase the dollars at a lower cost with a spot rate plus the cost of the premium of DM96 million. Lufthansa gained DM,, The Board also questions Ruhnau about the necessity of these aircrafts, the timing of purchase, and the purchase price agreed upon. Even if Ruhnau researched and followed these methods, they would still not predict with certainty the future U. However, when this was a new tool and would cost DM96,, The use of put options would have protected Lufthansa if the U. Ruhnau and many others may have expected a depreciation, but on one would have expected the dollar to fall to DM2.