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Herr had anticipated that the dollar would fall as it had reached its peak. With that in mind, he took the gamble of purchasing the aircrafts but scheduled the payment of the Boeing…
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Download file to see previous pages Herr acted on instinct, even though he gambled he eventually bought the Boeings when the dollar was at its lowest. In that aspect, Herr should not be accused of mistimed purchasing and thus should be retained as the chairman of Lufthansa airlines by the board.
2. Even though he had expected the dollar to depreciate, he would not have left the whole amount unhedged, due to a variety of factors. First Herr was not sure that the dollar was going to depreciate; he was just going by his instincts. In that aspect living, the whole amount unhedged would have lead to the firm using more money in purchasing the Boeings. Hedging half the amount was a brilliant idea as it ensured that either way; the company would not use a lot of money in buying the Boeings. If Herr had left the whole amount unhedged and the dollar appreciated further, the organization would have used the colossal amount of money in buying the Boeings. However, hedging half ensured that the firm was cushioned whether the dollar appreciated or depreciated the firm would still benefit. Faced with such uncertainties Herr made a wise decision in hedging half the amount.
Remaining uncovered as contemplated by the board would have had a positive impact, however, if the dollar would have appreciated and Herr’s anticipation proved wrong, then the firm would have lost a lot of money. Some of the risks associated with remaining uncovered include; higher spending.
Full forward cover also has some advantages as well as disadvantages. The advantage of full forward cover is that the firm would have been protected adequately against currency exposure. However, taking such a risk in purchasing would have been a dangerous option, most companies prefer taking such a risk in other lines of business other than purchasing.
3. Herr had expected the dollar to depreciate, however, leaving the whole amount unhedged was risky, and however using forward contracts was not a good idea. Herr was ...Download file to see next pagesRead More
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