Topic: MANAGEMENT TOOLS AND METHODS FOR FOREIGN CURRENCY TRANSACTION EXPOSURES: THE LUFTHANSA GROUP AND BRITISH AIRWAYS PLC
(1) List, compare and discuss tools and methods that have been employed by your chosen companies to manage their foreign currency transaction exposures.
Specifically, your report should provide inputs as follows:
(a) List and describe tools and methods employed by Company A
(b) List and describe tools and methods employed by Company B
(c) Compare your findings in (a) and (b), highlight and discuss the similarities and differences of tools and methods employed by these two companies.
(2) Critically evaluate each tool or method discussed in (1). You should quote relevant literature readings to support your arguments.
This material may consist of step-by-step explanations on how to solve a problem or examples of proper writing, including the use of citations, references, bibliographies, and formatting. This material is made available for the sole purpose of studying and learning - misuse is strictly forbidden.The Lufthansa Group
One of the chosen companies for purposes of this report is the Deutsche Lufthansa AG with a ticker symbol of LHA.DE as listed with the XETRA. As of May 10, 2018, the company’s shares traded with an adjusted closing price of €24.29 (Yahoo! Finance, 2018).
Hedging Tools and Methods
Based on the Lufthansa Group’s 2017 annual report, at least four types of hedging instruments are used to mitigate mainly fuel price risks (Lufthansa Group, 2018):
1. Forward contracts are used to hedge charter expenses, which more likely pertains to the group’s freight airline arm - the Lufthansa Cargo. In addition, full hedging is implemented as soon as a contract is signed.
2. A combination of options is used for fuel hedging, for purposes of market liquidity.
3. With respect to crude oil and kerosene hedges, futures and options are used.
4. Currency swaps are used to manage U.S. dollar exposure from planned fuel requirements.
British Airways Plc
The other chosen company is the British Airways Plc of the International Consolidated Airlines Group, S.A with a ticker symbol of IAG.L as traded through the London Stock Exchange. As of May 10, 2018, the company’s shares traded with an adjusted closing price of ₤693.20 (Yahoo! Finance, 2018).
Tools and Methods
Based on the British Airways’ 2017 annual report, a set of hedging instruments similar to the Lufthansa Group is used by the company to manage various foreign currency transaction exposures (Bristish Airways Plc, 2018):
1. Oil derivative forward contracts are used to partially hedge price risks. In particular, the hedging program is aimed at increasing predictability of cash flows as well as profitability.
A combination of fuel hedging derivatives, which includes options...