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    FNCE 6018 Group Project: Hedging at Porsche

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    joreal
    Porsche hedges its foreign exchange exposure from vehicle sales in North America to reduce currency risk. There are potential differences in interests between management and shareholders regarding hedging policy. The case study analyzes Porsche's euro cash flows from North American vehicle sales under different hedging strategies and exchange rate scenarios. Hedging with forward contracts or put options reduces currency risk compared to no hedging. As CEO, the author would implement the hedging strategy that best balances risk and returns for shareholders. Porsche's ownership structure could influence its hedging strategy if management and shareholders' interests differed. While options allowed Porsche to acquire a VW stake, some argued it distracted from its core

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    FNCE 6018 Group Project: Hedging at Porsche

    Uploaded by

    joreal
    244 views2 pages
    Porsche hedges its foreign exchange exposure from vehicle sales in North America to reduce currency risk. There are potential differences in interests between management and shareholders regarding hedging policy. The case study analyzes Porsche's euro cash flows from North American vehicle sales under different hedging strategies and exchange rate scenarios. Hedging with forward contracts or put options reduces currency risk compared to no hedging. As CEO, the author would implement the hedging strategy that best balances risk and returns for shareholders. Porsche's ownership structure could influence its hedging strategy if management and shareholders' interests differed. While options allowed Porsche to acquire a VW stake, some argued it distracted from its core

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    Project Porsche

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    Project Porsche

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    Porsche hedges its foreign exchange exposure from vehicle sales in North America to reduce currency risk. There are potential differences in interests between management and shareholders regarding hedging policy. The case study analyzes Porsche's euro cash flows from North American vehicle sales under different hedging strategies and exchange rate scenarios. Hedging with forward contracts or put options reduces currency risk compared to no hedging. As CEO, the author would implement the hedging strategy that best balances risk and returns for shareholders. Porsche's ownership structure could influence its hedging strategy if management and shareholders' interests differed. While options allowed Porsche to acquire a VW stake, some argued it distracted from its core

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    244 views2 pages

    FNCE 6018 Group Project: Hedging at Porsche

    Uploaded by

    joreal
    Porsche hedges its foreign exchange exposure from vehicle sales in North America to reduce currency risk. There are potential differences in interests between management and shareholders regarding hedging policy. The case study analyzes Porsche's euro cash flows from North American vehicle sales under different hedging strategies and exchange rate scenarios. Hedging with forward contracts or put options reduces currency risk compared to no hedging. As CEO, the author would implement the hedging strategy that best balances risk and returns for shareholders. Porsche's ownership structure could influence its hedging strategy if management and shareholders' interests differed. While options allowed Porsche to acquire a VW stake, some argued it distracted from its core

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 2

    SMU Classification: Restricted

    FNCE 6018 Group Project: Hedging at Porsche

    Analyse the following questions for the case study.

    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
    prospective? Are there potential differences in interest between management and shareholders
    regarding the hedging policy?
    (20 marks)

    2. Suppose it is end of November 2007, and Porsche views 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
    32750 vehicles. The low-sales scenario is 30% lower than the expected sales volume, and the
    high-sales scenarios is 30% higher than the expected sales volume. Assume in each scenario that
    the average sales price per vehicle is $90,000 and that all sales are realized at the end of
    November 2009. All variable costs incurred by producing and shipping an additional vehicle to be
    sold in North America in 2009 are billed in euros and amount to 60K euros per vehicle.
    Characterize how Porsche’s Euro cash flows, net of variable costs, obtained from its North
    American sales depend on the spot exchange rate that prevails at the end of November 2009, if:
    a) Porsche does not hedge its currency exposure at all;
    b) Porsche hedges by selling forward US$ 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$, receiving Euro, at the strike exchange rate) in sufficient quantity
    to have the right to sell an amount of US$ equal to expected 2009 sales.
    (20 marks)

    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?
    (15 marks)

    4. How might Porsche’s ownership structure influence the hedging strategy pursued by
    management?
    (15 marks)

    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 critics who argued that Porsche was speculating
    with shareholders’ money and that it had become a “hedge fund” that neglected its core business?
    (20 marks)

    6. Write up a report. Your report should not be more than 8 pages excluding content page &
    appendices (if any). Your report must be typed with minimum font size must be 11, 1.5-line
    spacing, written in good English and in a professionally acceptable format. The remaining 10
    marks will be scored based on the quality of the written report in terms of language, formatting,
    structure, contents flow, labelling of figures, charts, tables, etc.
    a. Written report quality (10 marks)
    SMU Classification: Restricted

    Grading Rubric Max Score Your score


    Q1 20%
    Q2 20%
    Q3 15%
    Q4 15%
    Q5 20%
    Quality of report 10%
    Total 100%

    Important remarks:

    1. Late report will have 20% deducted from the final score. No exception will be made.
    2. Plagiarism is considered as cheating. The report will receive 0% if 20% or more of the contents
    are found to be similar (including attempts at rephrasing) to other reports. No exception will
    be made.
    3. Free riding is an offence. Group members reported to be free-riders & found to be culpable
    will be given 0% on the group project. There will be a peer evaluation component where each
    group member evaluates the contribution of other group members (excluding the evaluator)
    to the overall written report.
    4. The entire group project carries 20% of your overall grade. The written report will constitute
    15%, while the peer evaluation will constitute 5%.

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