Lufthansa hedges the purchase of 20 Boeing jets (A). In January 1985, Lufthansa German Airlines purchased 20 Boeing 737 long-distance aircraft for US$500 million payable to Boeing exactly one year later. Because the U.S. currency had been steadily rising against the Deutsche mark (DM) since 1980 to reach DM 2. 30 =

US$1, Heinz Ruhnan, chairman of Lufthansa, had decided to hedge 50 percent of Lufthansa’s exposure with a forward contract at DM 3. 20 = US$1.

a. What are the other hedging strategies available to Lufthansa?

b. Compare graphically the 50 percent hedge strategy to the other approaches identified under part a.

c. If one-year interest rates available to Lufthansa are 5 percent and 8 percent in DM and US$, respectively, explain how Lufthansa could structure a synthetic forward contract.