Hedging At Porsche Case Study Solution
On September 26th, 2005; the announcement was made by Porsche to acquire the 20 percent stake in one of the Europe biggest carmakers i.e. Volkswagen. Volkswagen provided 30 percent of the components or parts used in cars offered by Porsche. This raised critics that it seemed like a corporatism where financial institutions and companies were cross holdings in each other,which was helping them in protecting one another from acquisitionand reducing the pressure from the stock markets, in order to improving productivity and the overall profitability.
Additionally, many analysts commented that there was a conflict of interest on account of the fact that Ferdinand Piech was being hired as CEO of & head of supervisory board at VW, who was also a member of supervisory board of Porsche & owner of the large fraction of Porsche voting shares. This in turn could divide Ferdinand Piech loyalty because of his competing interest towards more than one organization. The ground on which one could agree with the criticism is an increased possibility of conflict of interest due to the commitment towards two different organizations. Furthermore, due to the positive effects of VW stakes acquisitionand foreign exchange hedges on the company bottom line; many analysts and compensators also concluded that Porsche is only engaged in manufacturing its stocks rather than manufacturing cars because of which the company acquired stakes in VW instead of manufacturing cars.(Dickson, 2016).I do not agree with the criticism because of the rigorous market competition, unfavorable market dynamics and so forth. However, the hedge funds seem to be an aggressive investment strategy, which provides flexibility and increases the chances of diversification.
The global pandemic highlighted the significance of hedging foreign currency exposure in the institutional investment portfolio. The benefits that could be gained from the foreign exchange hedging in today uncertain times due to Covid-19 pandemic as the value of the US dollar surged in the quarter 1 of 2020. The company would gain positive cash flows, generated from hedging due to the required liquidity in March.(Pojarliev, 2020 ). Not hedging the foreign exchange exposure would put the company in financial distress, which could result in misfortune.
The extraordinary degree of volatility which is caused by the global pandemic, led to the dislocations in most of the currency markets, due to which the company might not hedge the foreign exchange risk because of a decline in the efficiency of Forex market during the outbreak of Covid19, causing a decreased global demand, blows of domestic outbreaks and fewer capital inflows.(Nguyen, 2020).
Porsche chose to hedge the foreign exchange exposure by relying on foreign exchange derivatives; whereas, its competitor BMW established a natural hedge to reduce the risk by concentrating on production in places with greater sales. This hedging provides various advantages, such as: help in avoiding the downside, help in enduring the market challenging conditions, protecting the trader against the interest rate change, pace volatility, currency rate changes and inflations. One of the greater disadvantages of natural hedge is that when lowering the exposure; the hedge also cuts the potential reward of investor, involves cost that could decrease the profit returns to an extent, and hedging must be done actively to manage the portfolio in an efficient manner…………………………….
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