Hedging at Porsche Case Solution & Answer

If Porsche did not hedge at all:

Because of the hedging the magnitude of the risk will be different. If Porsche don’t use the hedge option it will face the financial distresses during the year because in this case study it mentions that the U.S. dollar rate will be fallen. Because the company major portion of sale volume is from U.S. and company records its cost in the euros.

The organization had 40-50% of revenue generated from the Americas, if the organization haven’t opted for the hedging then this could affect the organization receivables. Without hedging the organization generated €1billion only. With hedging the company generated the profit of €4billion.

The other problem the company faced is that the company have to move towards the outside source of the equity if the company do not hedge the amount at all. The two owner do not want to dilute their ownership in the company shares.

The last not the least the magnitude of risk will be higher if the company do not hedge the sales amount. The competitor will earn greater profit because they have develop the manufacturing unit in U.S. This will increase the risk for the Porsche.

100% hedge using forward contracts and amount to be hedged:

It will earn more profit as come to without hedging. Other hand the risk of dollar rate will also be reduced. Because 40% to 50% of the sales are generated from U.S. If the company 100% hedge by using the forward contract, they do not need to move towards the first strategy that compromise on the quality not on the price. This will impact the reputation of the company in the market badly. On 28 November, 2007 the company earn from sale is €1billion after using the forward contract they generated the profit of €4 billion. If the company don’t hedge at all the company would not able to earn such profit.

100% forward contract exclude the dependence of exchange rate on the net income or net cash flow from the sales generated from the U.S. in the Porsche case if the actual sale turn to be lower than the projected sales, then the hedge by using the forward contract would leave the company under hedge or over hedge with the result that some of the exchange exposure exist(fernfort, 2010).

For the calculation of the projected sales in the year 2008 and 2009, assumed that the sales growth rate is 10% each year. The calculation on the hedge amount are shows in table # 1, appendix. The hedge amount is $318,433,328 and $323,721,082 in 2008 and 2009 respectively.

Table # 1

2007 2008 2008 – prediction 2009 2009 – prediction
Sales price 100,000 100,000 100,000 100,000 100,000
Total Cost 62,000 62,000 62,000 62,000 62,000
Spot rate 1.47 1.48 1.48 1.49 1.49
Total Cost 91,140 91,822 91,822 92,442 92,442
Profit 8,860 8,178 8,178 7,558 7,558
Spot 6,027 5,522 5,522 5,069 5,069
Total Vehicles 35,398 38,938 46,725 42,832 51,398
Total profit in euros 213,351,211 215,012,376 258,014,851 217,116,755 260,540,106
Total Profit in Dollars 313,626,280 318,433,328 382,119,994 323,721,082 388,465,298

This is just a sample partical work. Please place the order on the website to get your own originally done case solution.

Share This