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Cases in International Finance


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Title: Cases in International Finance

Cases in International Finance
  • Hedging Foreign Exchange Exposure

Case 1 Lufthansa
If Karl Marx could see what the foreign exchange
market is doing to captains of industry…a
successful corporate executive of one of the
worlds prestige airlines can put on a
multimillion dollar currency speculation and
win and still get lambasted by the critics.
Its enough to make a capitalist
cry! Intermarket, 1985
Some interesting Facts…
1926 Lufthansa was born through the merger of
Deutsche Aero Lloyd and Junkers Luftverkehr it
inherits its crane logo from DAL
1934 Lufthansa offers its first transatlantic
1990 Lufthansa resumes flights to Berlin
following German unification
1990 Lufthansa joins the star alliance with Air
Canada, SAS, Thai Airlines and United Airways
the first multinational airline grouping
Lufthansa Today
Lufthansa is the national carrier of Germany
headed by Wolfgang Mayrhuber (since 2003)
  • Revenue (2004) E 17B
  • Net Income (2004) E 383M
  • Passengers (2004) 50.9M
  • Load Factor (2004) 74

Lufthansa has 253 aircraft with an average age of
10.5 years. Boeing 40 Airbus 60
In January 1985, under the Chairmanship of Heinz
Ruhnau, Lufthansa purchased twenty 737 jets from
Boeing for 25,000,000 apiece (500M Total)
Length 100 Feet Wingspan 86 Feet Cruising
Speed 470 MPH Max Altitude 35,000 Feet Range
1000 Miles Seats 123
At the time, the exchange rate was DM 3.20 per
dollar. At this rate, the planes would cost
Lufthansa DM1.6B
Over the previous year, the dollar had been
appreciating against the Deutschmark..
Lufthansas Options
Option 1 Remain Uncovered The riskiest option
with the greatest potential gain (if the dollar
weakens against the Deutschmark) and the greatest
potential cost (if the dollar strengthens).
Option 2 Full Forward Hedge The safest of the
options. If Lufthansa bought dollars forward at
the current rate of 3.2, they could lock in a
cost of DM1.6B
Option 3 Option Hedge If Lufthansa purchased
put option on DM at 3.20 DM/ (or call options on
dollars), they could take advantage of the
potential gain from a dollar depreciation, but
still hedge the possible appreciation risk
Lufthansas Options
Option 4 Money Market Hedge Lufthansa could
obtain dollars now, by borrowing Deutschmarks,
converting them to dollars at DM 3.20 and then
depositing them in either a US bank or a
Eurodollar account until needed. In principle,
this should have the same effect as the forward
Option 5 Partial Hedge Lufthansa could
purchase 250 M dollars forward at DM 3.20 at
allow the remaining balance to be un-hedged.
Option 6 Cash Flow Matching Lufthansa could
try and generate 500M in ticket sales in the US
very unlikely!
Lufthansas Options
Full Forward
Option Hedge
Partial Hedge
Ruhnau was convinced that the dollar was going to
fall and opted for the partial hedge. He was
proved right as the dollar plummeted in the mid
Did Ruhnau make the right decision?
While Ruhnau was correct on the direction of the
dollar, he could have saved some money using
options rather than a partial hedge!
Case 1 Porsche
Porsche makes most of its cars in Germany, so
its costs are mainly in Euro. Yet a large chunk
of its revenues come from sales in America. The
Economist, June 5, 2003
Some interesting Facts…
Porsche was founded in 1931 by Ferdinand Porsche,
a former Daimler Benz director.
One of the first Porsche models…look familiar?
Some interesting Facts…
The first real Porsche designed in 1948
September 30, 1955 James Dean is killed driving
his Porsche 550 Spyder
Porsche Today
Porsche is led by President and CEO Dr. Wendelin
Wiedeking (since 1993)
  • Net Sales (2003) E 5.582B
  • Net Income (2003) E 565M
  • EPS(2003) E 32.29
  • EPS Growth (2003) 22

Porsche is essentially a privately held company.
All 8.75M voting shares are held by the Porsche
family. The remaining 8.75M non-voting shares
are primarily held by institutional investors
The Jewel in the Porsche Crown has always been
the 911 Series. (14 different 911 models
Engine 3.6l 6 Cylinder Engine Power 325 Hp _at_
6,800 RPM Acceleration 0-60 in 4.8 Sec. Top
Speed 177 Mph
Porsche 911 Carrera
Units Sold (2003) 27,789 Average Price E
92,000 Cost E 78,000 Profit Margin 16
The 911 commands almost exclusive ownership of
its market segment (high end sports cars). While
sales are cyclical, price elasticity is very low.
The Boxster was introduced in 1996 to compete
with the lowers end sport scars already on the
Engine 2.7l 6 Cylinder Engine Power 240 Hp _at_
6,400 RPM Acceleration 0-60 in 5.9 Sec. Top
Speed 160 Mph
Porsche Boxster
Units Sold (2003) 18,411 Average Price E
44,000 Cost E 41,000 Profit Margin 8
The Boxster is less cyclical than the 911,
but much more price sensitive particularly
since introduction of the BMW Z4 in 2003
Porsche recently gained entry into the lucrative
SUV market. Fuelled by SUV crazy Americans, the
launch of the Cayenne in 2002 has been hailed as
one of the most successful produce launches in
Engine 3.2l 6 Cylinder Engine Power 247 Hp _at_
6,000 RPM Acceleration 0-60 in 8.5 Sec. Top
Speed 133 Mph
Porsche Cayenne
Units Sold (2003) 20,603 Average Price E
68,000 Cost E 61,000 Profit Margin 10
The Cayenne is clearly at the high end for SUVs
Porsche is quickly moving to develop a lower
powered, lower cost version.
Porsches Growing Sales
Porsches Competitive Position
We learned the hard way that banks are never
there when you need them… Porsches anti-debt
Porsches Foreign Exchange Exposure
Porsche has the heaviest US exposure (and this is
increasing), yet it has the lowest rate of
natural hedging in the sector… (Citigroup)
Pricing Pressures
Porsches Newest Model, the 911 Carrera 4s
Cabriolet (2003)was priced in continental Europe
at E 85,000 (a 15 markup over cost of 72,000).
Simultaneously, the new Cabriolet was introduced
in the US for 93,000
Implied Exchange Rate

1.09 /E (.91 E/)
E 85,000
As the Dollar falls, so do profit margin!
At the current 1.29 per Euro exchange rate…
A profit margin of essentially zero over the cost
of E 72,000!!
E 72,093
1.29 /E
Alternatively, Porsche could price to 911 in the
US at a lower profit margin (say, that of the
Boxster -8)
E 72,000(1.08) E 77,800(1.29) 100,310
Price elasticity of the 911 is the lowest of the
various Porsche platforms, but could the US
market withstand a price increase of this
magnitude? (7.8)
Porsches Problem Defined
Porsche has three model lines with different
market characteristics 45 of Porsches sales
are in the US (1.836B per year)
With the exception of an assembly plant in
Finland (also a Euro country), all Porsches are
manufactured in Germany
As the dollar continues to decline, what options
does Porsche have to cover its currency exposure?
What did Porsche Actually Do?
Porsche chose an aggressive strategy of put
options on dollars (i.e. contracts to sell
dollars at a fixed price). Porsche maintains a 3
year rolling portfolio of put options with strike
prices based on currency forecasts. - Sales
revenues through model year 2006 are completely
  • Currency Exposure Covered by Derivative
  • BMW 35
  • Mercedes 30
  • Porsche 100
  • Volkswagen 30

Is this the best strategy?