INTRODUCTION Deutsche Lufthansa AG is the flag carrier of Germany and the largest airline in Europe in terms of overall passengers

carried and fleet size. The German government had a 35.68% stake in Lufthansa until 1997, but the company is now owned by private investors (88.52%), MGL Gesellschaft fr Luftverkehrswerte (10.05%), Deutsche Post bank (1.03%), and Deutsche Bank (0.4%) and has 119,084 employees (as of 2011). The name of the company is derived from Luft (the German word for "air"), and Hansa (after the Hanseatic League). The airline is the world's fourth-largest airline in terms of overall passengers carried, operating services to 18 domestic destinations and 203 international destinations in 78 countries across Africa, Americas, Asia and Europe. Together with its partners, Lufthansa services around 410 destinations. With over 710 aircraft it has the second-largest passenger airline fleet in the world when combined with its subsidiaries. Lufthansa's registered office and corporate headquarters is in Deutz, Cologne, Germany, with its main operations base (Lufthansa Aviation Center (LAC).The Chairman and CEO is Christoph Franz, Head of Supervisory Board is Jrgen Weber, CFO is Stephan Gemkow. Lufthansa is a founding member of Star Alliance, the world's largest airline alliance, formed in 1997. As a member of the DAX Lufthansa is one of the 30 largest publicly listed companies in Germany. Our share was represented with a weighting of 1.01 per cent in the index as of the end of the year. The market capitalisation of EUR 5.4bn corresponded to 24th place and also made Lufthansa the highest-valued publicly listed air transport group in Europe. The Lufthansa share is also included in other international indices such as the Dow Jones EURO STOXX Mid, MSCI Euro and FTSE Eurofirst 300..

A World Leader in the 1980s

In 1982, 80 percent of Lufthansa's stock was owned by the West German government. The board of directors, however, was appointed by Lufthansa's private investors. On June 22 of that year, the board of directors narrowly elected a new chairman to succeed Herbert Culmann. Culmann was a popular chairman, but he retired two years early to save his company embarrassment over allegations of kickbacks to travel agents. The new chairman was Heinz Ruhnau, a career bureaucrat with strong affiliations with the West German Social Democratic Party. His appointment generated an unusual amount of concern because many feared the ruling Social Democrats were attempting to politicize the airline. Ruhnau was an undersecretary in the Transport Ministry and a former chief assistant to the head of West Germany's largest trade union, IG Metall. He did not, however, have experience in private enterprise, and Lufthansa was being prepared for a further privatization of its stock. In 1985, the federal government held 74.31 percent of Lufthansa, 7.85 percent was held by government agencies, and the remaining 17.84 percent was held by private interests. Ruhnau assumed his post on July 1, 1982, in a smooth transition of leadership. Ruhnau's immediate tasks were to improve Lufthansa's thin profit margin and win the support of the company's 30,000 skeptical employees. The company's performance in 1982 was impressive and resulted in its selection as airline of the year by the editors of Air Transport World.

The foreign exchange market (forex, FX, or currency market) is a form of exchange for the global decentralized trading of international currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. EBS and Reuters' dealing 3000 are two main interbank FX trading platforms. The foreign exchange market determines the relative values of different currencies.[1]

The foreign exchange market assists international trade and investment by enabling currency conversion. For example, it permits a business in the United States to import goods from the European Union member states especially Eurozone members and pay Euros, even though its income is in United States dollars. It also supports direct speculation in the value of currencies, and the carry trade, speculation based on the interest rate differential between two currencies.[2]

In a typical foreign exchange transaction, a party purchases some quantity of one currency by paying some quantity of another currency. The modern foreign exchange market began forming during the 1970s after three decades of government restrictions on foreign exchange transactions (the Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states after World War II), when countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the Bretton Woods system.

The foreign exchange market is unique because of the following characteristics:

its huge trading volume representing the largest asset class in the world leading to high liquidity; its geographical dispersion; its continuous operation: 24 hours a day except weekends, i.e., trading from 20:15 GMT on Sunday until 22:00 GMT Friday; the variety of factors that affect exchange rates; the low margins of relative profit compared with other markets of fixed income; and the use of leverage to enhance profit and loss margins and with respect to account size.

As such, it has been referred to as the market closest to the ideal of perfect competition, notwithstanding currency intervention by central banks. According to the Bank for International Settlements,[3] as of April 2010, average daily turnover in global foreign exchange markets is estimated at $3.98 trillion, a growth of approximately 20% over the $3.21 trillion daily volume as of April 2007. Some firms specializing on foreign exchange market had put the average daily turnover in excess of US$4 trillion.[4]

The $3.98 trillion break-down is as follows:

$1.490 trillion in spot transactions $475 billion in outright forwards $1.765 trillion in foreign exchange swaps $43 billion currency swaps $207 billion in options and other products

Spot rate: A foreign exchange spot transaction, also known as FX spot, is an agreement between two parties to buy one currency against selling another currency at an agreed price for settlement on the spot date. The exchange rate at which the transaction is done is called the spot exchange rate. Settlement date

The standard settlement timeframe for foreign exchange spot transactions is T + 2 days; i.e., two business days from the trade date. A notable exception is the USD/CAD currency pair, which settles at T + 1. Execution methods

Common methods of executing a spot foreign exchange transaction include the following:[1]

Direct. Executed between two parties directly and not intermediated by a third party. For example, a transaction executed via direct telephone communication or direct electronic dealing systems such as Reuters Conversational Dealing.

Electronic broking systems. Executed via automated order matching system for foreign exchange dealers. Examples of such systems are EBS and Reuters Matching 2000/2.

Electronic trading systems. Executed via a single-bank proprietary platform or a multibank dealing system. These systems are generally geared towards customers. Examples of multibank systems include FXall, Currenex, FXConnect, Globalink and eSpeed.

Voice broker. Executed via telephone communication with a foreign exchange voice broker. FORWARD CONTRACT: a forward contract or simply a forward is a non-standardized contract between two parties to buy or sell an asset at a specified future time at a price agreed upon today.[1] This is in contrast to a spot contract, which is an agreement to buy or sell an asset today. The party agreeing to buy the underlying asset in the future assumes a long position, and the party agreeing to sell the asset in the future assumes a short position. The price agreed upon is called the delivery price, which is equal to the forward price at the time the contract is entered into.

The price of the underlying instrument, in whatever form, is paid before control of the instrument changes. This is one of the many forms of buy/sell orders where the time and date of trade is not the same as the value date where the securities themselves are exchanged.

The forward price of such a contract is commonly contrasted with the spot price, which is the price at which the asset changes hands on the spot date. The difference between the spot and the forward price is the forward premium or forward discount, generally considered in the form of a profit, or loss, by the purchasing party.

Forwards, like other derivative securities, can be used to hedge risk (typically currency or exchange rate risk), as a means of speculation, or to allow a party to take advantage of a quality of the underlying instrument which is time-sensitive. How a forward contract works

Suppose that Bob wants to buy a house a year from now. At the same time, suppose that Andy currently owns a $100,000 house that he wishes to sell a year from now. Both parties could enter into a forward contract with each other. Suppose that they both agree on the sale price in one year's

time of $104,000 (more below on why the sale price should be this amount). Andy and Bob have entered into a forward contract. Bob, because he is buying the underlying, is said to have entered a long forward contract. Conversely, Andy will have the short forward contract.

At the end of one year, suppose that the current market valuation of Andy's house is $110,000. Then, because Andy is obliged to sell to Bob for only $104,000, Bob will make a profit of $6,000. To see why this is so, one needs only to recognize that Bob can buy from Andy for $104,000 and immediately sell to the market for $110,000. Bob has made the difference in profit. In contrast, Andy has made a potential loss of $6,000, and an actual profit of $4,000.

The similar situation works among currency forwards, where one party opens a forward contract to buy or sell a currency (ex. a contract to buy Canadian dollars) to expire/settle at a future date, as they do not wish to be exposed to exchange rate/currency risk over a period of time. As the exchange rate between U.S. dollars and Canadian dollars fluctuates between the trade date and the earlier of the date at which the contract is closed or the expiration date, one party gains and the counterparty loses as one currency strengthens against the other. Sometimes, the buy forward is opened because the investor will actually need Canadian dollars at a future date such as to pay a debt owed that is denominated in Canadian dollars. Other times, the party opening a forward does so, not because they need Canadian dollars nor because they are hedging currency risk, but because they are speculating on the currency, expecting the exchange rate to move favorably to generate a gain on closing the contract.

In a currency forward, the notional amounts of currencies are specified (ex: a contract to buy $100 million Canadian dollars equivalent to, say $114.4 million USD at the current ratethese two amounts are called the notional amount(s)). While the notional amount or reference amount may be a large number, the cost or margin requirement to command or open such a contract is considerably less than that amount, which refers to the leverage created, which is typical in derivative contracts.

COMPARISONS

Indian Rupee The USDINR spot exchange rate depreciated 2.7738 or 4.99 percent during the last 30 days. Historically, from 1973 until 2012, the USDINR averaged 30.8900 reaching an all time high of 57.1300 in June of 2012 and a record low of 7.1900 in March of 1973. The USDINR spot exchange rate specifies how much one currency, the USD, is currently worth in terms of the other, the INR. While the USDINR spot exchange rate is quoted and exchanged in the same day, the USDINR forward rate is quoted today but for delivery and payment on a specific future date. This page includes a chart with historical data for USDINR - Indian Rupee Exchange rate.

GERMANY EXPORT PRICES

GERMANY CURRENCY Germany has adopted the euro. The EURUSD spot exchange rate appreciated 0.0351 or 2.81 percent during the last 30 days. Historically, from 1975 until 2012, the EURUSD averaged 1.1900 reaching an all time high of 1.6000 in April of 2008 and a record low of 0.6400 in February of 1985. The euro is the official currency of Germany, which is a member of the European Union. The Euro Area refers to a currency union among the European Union member states that have adopted the euro as their sole official currency. In Germany, interest rate decisions are taken by the Governing Council of the European Central Bank. This page includes a chart with historical data for EUR/USD - Exchange Rate in Germany.

RANKING ( Data from Jan 1985 to march 1986)

India Inflation Rate The inflation rate in India was recorded at 7.55 percent in August of 2012. Historically, from 1969 until 2012, India Inflation Rate averaged 7.8 Percent reaching an all time high of 34.7 Percent in September of 1974 and a record low of -11.3 Percent in May of 1976. Inflation rate refers to a general rise in prices measured against a standard level of purchasing power. The most well known measures of Inflation are the CPI which measures consumer prices, and the GDP deflator, which measures inflation in the whole of the domestic economy. This page includes a chart with historical data for India Inflation Rate.

United States Interest Rate The benchmark interest rate in the United States was last reported at 0.25 percent. Historically, from 1971 until 2012, the United States Interest Rate averaged 6.2 Percent reaching an all time high of 20.0 Percent in March of 1980 and a record low of 0.3 Percent in January of 2011. In the United States, the authority for interest rate decisions is divided between the Board of Governors of the Federal Reserve (Board) and the Federal Open Market Committee (FOMC). The Board decides on changes in discount rates after recommendations submitted by one or more of the regional Federal Reserve Banks. The FOMC decides on open market operations, including the desired levels of central bank money or the desired federal funds

market rate. This page includes a chart with historical data for the United States Interest Rate.

United States Inflation Rate The inflation rate in the United States was recorded at 1.70 percent in August of 2012. Historically, from 1914 until 2012, the United States Inflation Rate averaged 3.4 Percent reaching an all time high of 23.7 Percent in June of 1920 and a record low of -15.8 Percent in June of 1921. Inflation rate refers to a general rise in prices measured against a standard level of purchasing power. The most well known measures of Inflation are the CPI which measures consumer prices, and the GDP deflator, which measures inflation in the whole of the domestic economy. This page includes a chart with historical data for the United States Inflation Rate.

United States Import Prices Import Prices in The United States increased to 138.80 in August of 2012 from 137.80 in July of 2012, according to a report released by the U.s. Bureau Of Labor Statistics (bls). Historically, from 1982 until 2012, the United States Import Prices averaged 103.59 reaching an all time high of 147.50 in July of 2008 and a record low of 75.00 in March of 1986. This page includes a chart with historical data for the United States Import Prices.

Facts of the Case

The US$ had been rising steadily and rapidly since 1980, and was approximately DM3.2/$ in January 1985. Worst case scenario: US$ continues to appreciate. In January 1985, Lufthansa, under the chairmanship of Heinz Ruhnau purchased twenty 737 jets from Boeing. The agreed upon price was $500 million, payable in US$ on delivery of the aircrafts in one year, that is in January 1986.

He said Like others at that time, he believed that the US$ had risen about as far as it
was going to go, and would probably begin to fall by the time January 1986 rolled around.

The Alternative he has: 1. Remain uncovered 2. Full forward cover 3. Option hedging 4. Money market hedge Remain Uncovered: It is the maximum risk approach. If e = DM 2.2/$ by January 1986, the purchase of the jets would be only DM 1.1 billion. If e = DM 4/$ the total cost would be DM 2 billion. Many firms believe that: Uncovered position = currency speculation. Fully Forward Cover: This approach would have locked in an exchange rate of DM 3.2/$, with a known final cost of DM 1.6 billion.

Foreign Currency Option: A put option on the DM at DM 3.2/$, could locked in DM 1.6 billion plus the cost of the option premium (DM 96 million). The total cost of the purchase in the event the put was exercised would be DM 1.696 billion.

Money Market Hedge: Obtain the $500 million now and hold those funds in an interest-bearing account or asset until payment was due. What ultimately eliminated this alternative for consideration was that Lufthansa had several covenants that limited the types, amounts, and currencies of denomination of the debt it could carry on its balance sheet.

Heinz Ruhnau Decision:

Ruhnau covered forward half of the exposure ($250 million) at DM 3.2/$, and left the remaining half uncovered.

Outcome:
The dollar weakened from DM 3.2/$ to DM 2.3/$.

Aftermath:
On February 14, 1986, Heinz Ruhnau was summoned to meet with Lufthansa's board and with Germany's transportation minister to explain his supposed speculative management of Lufthansa's exposure in the purchase of Boeing jets.

Herr Ruhnau was accused of recklessly speculating with Lufthansa's money, but the speculation was seen as the forward contract, not the amount of the exposure left uncovered for the full year .

Herr Ruhnau was accused of making the following mistakes:

1. Purchasing the Boeing aircraft at the wrong time. 2. Choosing to hedge half of the exposure when he expected the dollar to fall.
3. Choosing forward hedging over options. 4. Purchasing Boeing jets at all.

What went wrong for Mr. Herr Ruhnau?

Lufthansas board should have chosen DM1.6 b as a benchmark (DM3.2/$).Herr Ruhnau expected the dollar to fall; hence, he should have used option hedging.

Conclusions: After doing the exercise and research work we came to know about the following things: 1. Expect the exchange rate to move against you? Use forward hedging. 2. Expect the exchange rate to move in your favor? Use option hedging. 3. The benchmark has to be ex-ante not ex-post. So it is very necessary to use the proper things at proper time.