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    Case Study 2

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    Ravi Patel
    1) Porsche hedges its foreign exchange exposure to protect its cash flows from currency fluctuations that could harm shareholders. However, hedging may not always align with management's interests in taking risks for higher returns. 2) The document analyzes Porsche's potential cash flows from North American vehicle sales under different exchange rate and sales scenarios if it a) does not hedge, b) uses forward contracts, or c) uses put options. 3) It asks for an assessment of Porsche's hedging strategy and whether a different approach would be preferable given the analysis. It also questions how Porsche's ownership structure could influence its hedging strategy.

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    Case Study 2

    Uploaded by

    Ravi Patel
    480 views1 page
    1) Porsche hedges its foreign exchange exposure to protect its cash flows from currency fluctuations that could harm shareholders. However, hedging may not always align with management's interests in taking risks for higher returns. 2) The document analyzes Porsche's potential cash flows from North American vehicle sales under different exchange rate and sales scenarios if it a) does not hedge, b) uses forward contracts, or c) uses put options. 3) It asks for an assessment of Porsche's hedging strategy and whether a different approach would be preferable given the analysis. It also questions how Porsche's ownership structure could influence its hedging strategy.

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    1) Porsche hedges its foreign exchange exposure to protect its cash flows from currency fluctuations that could harm shareholders. However, hedging may not always align with management's interests in taking risks for higher returns. 2) The document analyzes Porsche's potential cash flows from North American vehicle sales under different exchange rate and sales scenarios if it a) does not hedge, b) uses forward contracts, or c) uses put options. 3) It asks for an assessment of Porsche's hedging strategy and whether a different approach would be preferable given the analysis. It also questions how Porsche's ownership structure could influence its hedging strategy.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    480 views1 page

    Case Study 2

    Uploaded by

    Ravi Patel
    1) Porsche hedges its foreign exchange exposure to protect its cash flows from currency fluctuations that could harm shareholders. However, hedging may not always align with management's interests in taking risks for higher returns. 2) The document analyzes Porsche's potential cash flows from North American vehicle sales under different exchange rate and sales scenarios if it a) does not hedge, b) uses forward contracts, or c) uses put options. 3) It asks for an assessment of Porsche's hedging strategy and whether a different approach would be preferable given the analysis. It also questions how Porsche's ownership structure could influence its hedging strategy.

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    Assignment Questions: Hedging at Porsche

    1) Why does Porsche hedge its foreign exchange exposure? Does it make sense, from the
    perspective of shareholders, for Porsche to hedge? Does it make sense from
    management’s perspective? Are there potential differences in interest between
    management and shareholders regarding the hedging policy?
    2) Suppose it is end of November 2007, and Porsche reviews its hedging strategy for the
    cash flows it expects to obtain from vehicle sales in North America during the calendar
    year 2009. Assume that Porsche entertains three scenarios: The expected volume of
    North American sales in 2009 is 32,750 vehicles. The low-sales scenario is 30% lower
    than the expected sales volume, and the high-sales scenario is 30% higher than the
    expected sales volume. Assume, in each scenario, that the average sales price per vehicle
    is $90,000 and that all sales are realized at the end of November 2009. All variable costs
    incurred by producing and shipping an additional vehicle to be sold in North America in
    2009 are billed in € and amount to €60,000 per vehicle. Characterize how Porsche’s €
    cash flows, net of variable costs, obtained from its North American sales depend on the
    spot exchange rate that prevails at the end of November 2009, if:
    a. Porsche does not hedge its currency exposure at all;
    b. Porsche hedges by selling forward US$ equal to the amount of expected 2009
    sales with a two-year forward contract;
    c. Porsche hedges by buying two-year European at-the-money put options on US$
    (providing to Porsche the right to sell US$, receiving €, at the strike exchange
    rate) in sufficient quantity to have the right to sell an amount of US$ equal to
    expected 2009 sales.
    3) Based on your analysis of question 2, what’s your view on the foreign exchange hedging
    strategy and the hedging instruments chosen by Porsche? If you were Porsche’s CEO,
    would you implement a different strategy? If yes, why? If no, why not?
    4) How might Porsche’s ownership structure influence the hedging strategy pursued by
    management?
    5) Do you think Porsche’s strategy of using options to acquire a stake in VW (instead of
    buying stocks 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” that neglected its core business?

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