Hedging At Porsche Harvard Case Solution & Analysis

Hedging At Porsche Case Study Solution

From the perspective of the management, the hedging strategy makes little sense, as Porsche had believed that it should be hedging its foreign exchange risk which will be not dependent on the future foreign exchange rate and its developments might have form the side of management of Porsche. The aim of the board was to avoid the financial trap, as it is never possible to beat the market. However, to a major extent, the hedging of the financial exposure would also be in the long term interest of the management of Porsche, as it would save the company from huge losses and bankruptcy. Management would be looking for their secure jobs and hefty bonuses, which is only possible if the company grows and performs well, even in the volatile times. Thus, we can conclude that the interests of the shareholders and the management are different with respect to the hedging policy of Porsche.

How might Porsche's ownership structure influence the hedging strategy pursued by management?

The ownership structure of Porsche could influence the hedging strategy pursued by the management in a number of ways. First, if the majority of the independent directors on the board of Porsche are against this aggressive hedging strategy of Porsche, then the company might have to withdraw its hedging strategy, and it might reduce the hedge ratio as well. Secondly, it has also been observed in the past that there had been conflicts of interest, due to which the company invested in the stock options of Volkswagen rather than directly buying the stocks of its own company. So, the hedging strategy will help to hedge the financial exposure,which might be harmful for the company and its shareholders, in the upcoming years, due to the devaluation of the United States’ dollar against Euro.

In case of strong dollar rate, the hedging cannot be exercised by using option contracts. Thus, the cash flows would be same to the cash flows without hedging.However,a minimum cost would be incurred in purchasing the option contract. In case of weak dollar, the cash flows would be similar to forward hedge, again, the minimum cost would be incurred in purchasing the option contract.(Armeanu, 2017).

Options are highly used in order to minimize the risk of the loss occurrence in the future. In addition to this, the return on portfolio can also be enhanced, and the company could enjoy additional profits as well.

Do you think that Porsche' s strategy of using options to acquire a stake in VW (instead of buying stock directly) is a sensible one? Or do you agree with the critics who argued that Porsche was speculating with shareholders' money and that it had become a " hedge fund & quot; that neglected its core business?

The hedging strategy that is followed by Porsche for hedging the foreign exchange risk exposure, is options contract. In this options contract, the Porsche’s management has made both the contracts in the form of put options and call options. These are money market options which are used to lock the current spot rates for the future in order to hedge the foreign exchange rates. This thing will help the company to minimalize the financial distress in the organization, which can increase the need to contemplate the external financing that are opposed by the owners of the company.

The future and forward contracts are the best examples of options to hedge the foreign exchange rate exposures, for the purpose of reducing the risk associated with Porsche in case of uncertain sales in upcoming years. In both of the options technique, Porsche can hedge the money market in order to avoid the uncertainties in the future sales made in the United States.

At the point when the dollar is more grounded than foreseen; the drawback can harm the company and its ultimate goal, which are needed to be just conveyed by forward hedge. If the normal deals are higher than real, Porsche would wind up being over supported. Both of the techniques are comparable, the choice of hedging can be utilized in order to maintain a strategic distance from the situation of expensive drawbacks as well as the barriers, which are associated with the company,and where the expected deals are higher than real. Then again, the misfortunes result are because of the outside trade hedging. It is recommended to Porsche that so as to maintain a strategic distance from the requirement for outside financing and monetary pain, the most ideal is to dodge the drawback situation.


Appendix 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                    91,140.00               91,822.00                       91,822.00               92,442.00                        92,442.00
Profit                            8,860                       8,178                               8,178                       7,558                                 7,558
Spot                      6,027.21                 5,521.94                         5,521.94                 5,069.08                           5,069.08
Total Vehicles                          35,398               38,937.80                       46,725.36               42,831.58                        51,397.90
Total profit in euros         213,351,210.88    215,012,375.69            258,014,850.83    217,116,754.96              260,540,105.95
Total Profit in Dollars               313,626,280    318,433,328.40            382,119,994.08    323,721,081.64              388,465,297.97


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