Lufthansa hedges the purchase of 20 Boeing jets (B). Heinz Ruhnan could have considered the use of currency options.

a. What would be the advantage of using a currency option to hedge currency risk? Should Lufthansa buy or write an option? Should it be a call or a put option?

b. At-the-money options cost 6 percent. What would be the cash cost to Lufthansa to fully hedge its exposure with a currency option? When would its cost be incurred?

c. Sketch graphically a currency option hedge and compare it with a forward contract hedge. Would you expect Lufthansa board of directors to be favorable to a currency option hedge?

d. Would you advise the use of a forward participation agreement? At what price?