Lufthansa

Case
Corporate Hedging Strategies

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Lufthansa is not a risk averse firm as shown by the following
facts:

• Risk is assumed to be of significance if there is a possibility

1. Lufthansa a risk-averse
of a loss to the extent of at least one third of the earnings
necessary for maintaining the value of the firm.

• Also if we go further in the case the crack hedging for one firm? How would you
month for kerosene is only 45%.
categorize the hedging
• Lufthansa has 85% of its borrowings at variable interest
rates. strategy of Lufthansa –
Lufthansa’s hedging strategy can be considered as active
active hedging or
hedging because they hedge the part of their risks (as given in
case of kerosene). Also Lufthansa benefits from this as the
passive hedging?
risk strategy remains unchanged and allows the firm to take
business opportunities when risk-adjusted returns are
comparable with market returns and risks are within an
acceptable limit.

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2.
01.
Layered Hedge
The company Hedges following
six months at 90% in derivatives
and reduces for the following 18
months by 5% each.
Comment on the risk management policy of
Lufthansa?
02.
Crack Hedge
A crack hedge for 7.5% of planned
consumption per month is added
for following six months i.e. 45%,
37.5%, 30%, 22.5%, 15% and
7.5%
03.
Currency Hedge
Of the 56 currencies in use within
the Lufthansa group, 16 are
actively managed. The most
important currencies are US
dollar, Japanese Yen and Great
Britain Pound.
04.
Interest Hedge
Lufthansa has 85% of its
borrowings at variable interest
rates. Their natural hedge model
helps them to reduces interest
expenses and minimizes earnings
volatility.
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 2. How has layered hedging helped the firm in its risk
(Cont.) management?

As a result of their hedging strategies, 120

110

Firm Average Price ($/barrel)

100 100
average fuel price of Lufthansa Group 80
72
70
80
78
90
80 85 90

60 62
60
in US dollar per barrel has been lesser 40
50
40
52
50

than the market price whenever 20

0
market prices have been higher than 40 50 60 70 80 90 100 110
$ per Barrel
US $ 80 per barrel. Firm Price Market Price

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3. What methods could be employed 120
by the firm to benefit from exchange

Firm Average Price ($/barrel)

100
rate hedges even when the price per 80
barrel falls below average futures 60
price? 40

20

0
The firm could benefit from investing in the barrels 40 50 60 70 80 90 100 110
when price is below certain threshold by using it in $ per Barrel
the future when its higher and outside a certain risk.
Firm Price Market Price

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 4. How do variable interest rate borrowings
constitute a natural hedge?

Natural Hedging
› Natural Hedging is the balancing act by
adding assets that have a negative
correlation.
› For instance, incurring expenses in the Lufthansa Measures
same currency in which the company
generates revenues. This lowers Lufthansa takes debt in different ‹
exchange rate risk. currencies at different rates. This
constitutes natural hedge
The aim of interest rate risk ‹
management for Lufthansa group is to
reduce interest expenses

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5. Would you categorize Lufthansa as a speculative firm?

Management
Y There risk strategy is to take business opportunities
when risk-adjusted returns are comparable with
market returns and risks are within an acceptable
Airline Industry limit.
Being in airline industry , they have to speculate on
Fuel prices, Pricing of tickets and Route. The risk management committee of the firm uses a
risk map to ensure that risks are continuously
As the nature of above items are volatile because
they are highly affected by geo-political , economic
E identified and evaluated.

conditions and competition .

Debt
Lufthansa has 85% of its borrowings at variable
interest rates. Lufthansa uses mostly contrary
S movements of the operating result (natural hedge)
while at the same time minimizing average interest
expenses.

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Thank You
Presented by:

Ashish Jakhar (MS18A003)

Prashant Kumar (MS18A027)
Prateek Gupta (MS18A028)