Hedging at Porsche Harvard Case Solution & Analysis

ABSTRACT

Porsche founded in 1931 in Germany. Porsche initially offered development work on vehicle and checking. Initially they did not manufacturing cars under its brand name. Now Porsche is an independent and successful car manufacturer all over the world especially in U.S. the main competitors are BMW and Mercedes. The company buildsa strong brand image.

This report is based on the exchange rate and hedge in the foreign markets. Porsche manufactures its car in Germany, so the all the cost related to the manufacturing were recorded in euro. The major portion of the sales is from U.S. market. So, the sales were generated in dollars. In order to reduce the exchange rate risk, company started hedging in the foreign exchange market. Initially company’s’ profit recorded was 4 billion euro because of the hedging.

Their competitors built the manufacturing house in U.S. and use natural hedge. This strategy will reduce the risk of exchange rate fluctuations and earn more profit. In order to reduce the exchange rate exposure, Porsche built two strategies. The first strategy is compromise on the quality not on price and the second strategy is use of put option. Porsche decided to remain in the state of hedging in foreign exchange market. The company can either use the option and forward contracts. Porsche had purchased large number of options on the shares of Europe’s automaker, Volkswagen.

Hedging at Porsche Harvard Case Solution & Analysis

Introduction

Porsche was a sports car manufacturing company. The 911, Cayman car, Boxster and Cayenne sports are the additional product line of Porsche in 2007. The manufacturing plant was built in Germany. Porsche was a private and family owned business. The two families; Porsche and Piech are owner of Porsche. 40% to 50% of sales are generated from the U.S. and the company records its financial facts in euro. So company used the foreign exchange to record the profit. Because most of the sales in U.S. dollar, the company faced exchange rate fluctuations.  The company is now a part of foreign exchange market and use the put option to reduce the risk. The competitors of Porsche are better state on the inputs.

Findings and discussions

To hedge its foreign currency exposure:

Porsche’s exposure to foreign currency is highly dependent on the U.S dollar rate. Because the large portion of sale is collected from the U.S economy and in Europe the manufacturing of goods take place which makes Europe the presentation currency for Porsche. Hence,
all the cost being recorded in euros such as the operating cost in 2007 is 7,530,093 euro.  The competitors of Porsche use hedge option in order to deal with risk. To use the hedge option Porsche can reduce the risk and it seems the perfect policy.

If the investor use hedge for diversityof funds and when there is not more risks of financial suffering then hedge can generate value for the investor. This benchmark could be applied in the case of Porches. The financial suffering cost include this possibility. For a company who is considered as a luxurious car manufacturer could include the financial suffering..............

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