Hedging At Porsche Case Solution
Porsche is a high-performance carmaker based in Stuttgart, Germany. Porsche sports cars are known for their reliability, best performance and excellent quality. At the end of the year 2009, the Porsche product line included the Boxster, 911, Cayman sports car and Cayenne SUV.
Porsche is known for its mature and dynamic work environment among competitors and customers. Its first product was named911, which was manufactured and manufactured in 1964 and had become very famous and successful at various stages of its life cycle. The 911 product had become very important all over the world in a very short time(Porsche AG , 2017).
As we all know, Porsche is owned by Germany, but 40 to 45% of its total revenue comes from the United States. Here, Porsche’s main competitors are BMW and Mercedes-Benz. BMW and Mercedes have a better service position than Porsche, because they are very receptive to expansion, location and manufacturing opportunities that are critical to the potential growth and success.
Due to high working leverage; the exchange rate is expected to fluctuate rapidly and unexpectedly. Therefore, Porsche needs to guard against exchange rate fluctuations in order to control the exchange rate risks, as explained above, 40 to 45% of its total turnover comes from the United States.
Porsche’s competitors, such as: BMW and Mercedes (Mercedes) have developed good strategies for operational risks. However, Porsche is very concerned about the operational risks of the past, which are affected by the rise and fall of the US dollar against the German currency. To minimize the risks associated with foreign exchange issues; Porsche has adopted a series of operational risk management strategies, the first of which is competition in the quality of vehicles and sports cars, as well as protection against exchange rate fluctuations by making put options aggressive.
Motivations for Hedging Exposure and Hedging Policy
After experiencing the point of contact for bankruptcy in the 1990s, Porsche’s management formulated a risk management policy to avoid such situations in future. Therefore, there are many reasons to hedge Porsche’s foreign exchange risk, the first being to increase the liquidity and leverage on the balance sheet. Furthermore, if a business depends on banks to avoid its liquidity problems;and take out a bank loan from banks; it might not be the right choice for the business. An enterprise should rely on its internal cash flows as well as its cash and cash equivalents. The second option for the company is to protect itself from exchange rate fluctuations between the dollar and the Euro.
To ensure its profitability, the company hedged the financial risks associated with the devaluation of the US dollar, which ultimately reduced the company’s profitability due to the appreciation of the euro against the US dollar. The same problem was encountered in the 1990s, when the company was unable to defend itself against the devaluation of the U.S. dollar and it went bankrupt.
The main motivation for Porsche’s management is the use of financial derivatives, such as: put and call options, futures and futures contracts to hedge currency risk and combine dollar income. costs in dollars. This is the best solution to protect your business from external risks. The call and put options are exercised by the company after reaching the desired floor, within which the exchange rate risk could be tolerated.
If we look at the Exhibit 1 of the case document, we can see that the US exchange rate against the euro has risen, which means that the dollar has depreciated against the Euro. By placing it on the ground, Porsche will be able to obtain the minimum euro for every dollar the company earns in the United States, and these dollars can be easily converted to Euros at a given exchange rate. This means that Porsche is able to withstand the exchange rate risks and limit the losses it suffered in the 1990s. The hedging strategy developed rapidly in the year 2007, as shown in the Exhibit 1 of the case document, which is a huge profit margin for the company.
From a shareholder perspective, Porsche needs to protect its exposure to exchange rate risk, as this was the main reason it hit the tentacles of bankruptcy in the 1990s. This is the biggest failure of Porsche, which the company’s management would never forget. Therefore, in this case, the company must take certain precautions to avoid the future deviations.
Therefore, exposure to exchange rate risk needs to be protected in order to save shareholders’investments and maximize total assets. This is the ultimate goal in founding the company by Porsche. Therefore, for shareholders, this hedging strategy is the best strategy because its ultimate goal is to maximize the total assets………………….
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