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

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?