The case is about the Lufthansa Airline which is going to buy 20 new 737 Boeing airplanes for $500 million. The plane is ordered in January 1985, and the payment is to be made on January 1986. The need for this deal was because of its increasing passenger volume as well the revenue of Lufthansa was increasing at a rate sufficient to afford the deal. However, the main issue in the case was the problem caused due to the appreciating value of dollars as compared to Deutsche marks.
Heinz Ruhnau, the chairperson of the board of Lufthansa, was worried because of this appreciating dollar, as this would cost Lufthansa to pay a hefty amount for each Boeing airplanes. The fact that the booming US economy was as clear as a mirror to predict that the appreciation of the dollar was most likely to continue even in 1986. However, the fluctuation of the exchange rate was difficult to predict. The pattern of fluctuation that might occur in the future could not be predicted hence making the mode of payment by Lufthansa, confusing and complicated. This led Lufthansa exposed to exchange rate risk due to high volatility as both Deutsche Mark and US dollar floated in the market, and both countries chose to keep inflation steady. It was agreed that US dollar was overvalued, so G7 countries including the United States Congress wanted to curb the growing dollar for the benefit of US economy.
The concern of the chairman regarding the payment for the new 20 Boeings was due to the dollar appreciation. As a result of this, Heinz Ruhnau identified four different alternatives to cover the risk that might arise in the future.
