Porsche's Foreign Exchange Exposure

Case Study- Porsche – Questions and Pointers
Name Course Instructor Date
1. Should Porsche hedge its Foreign Exchange exposure? Does it make sense from the perspective of shareholders? Explain Why or why not?
Porsche is hedging to reduce their exposure to exchange rate volatility, which affects earnings and the cash flows and shareholders want to protect against potential exchange arte losses/. The company can use futures contracts or the currency swaps as they help to set the target the exchange rate Porsche has operations in the domestic and international market, which exchange rate fluctuation for foreign currencies affects international demand for the company’s products The futures and currency swaps are useful as the change in value depends on the foreign currency exchange rates change. In the 2006/ 2007 financial year, Porsche’s foreign exchange hedging resulted in €250 million for the company’s bottom-line (Hedging at Porsche). Thus, being in a favorable foreign position will help reduce the risk of Porsche being exposed to foreign exchange losses. Hedging to reduce exposure to risks linked to foreign currency exchange rate changes and interest rates, but Porsche‘s shareholders also expect that the company assess risk and does not use hedging for speculative trading purpos
2.
a. Porsche does not hedge its currency exposure at all;
 

Expected

Low sales scenario

High sales scenario

Number of vehicles sold

32,750

22,925

42,575

Price

$90,000

$90,000

$90,000

Revenue

$2,947,500,000

$2,063,250,000

$3,831,750,000

 

 

 

 

Variable cost per unit in Euro €

60,000

60,000

60,000

Total variable cost in Euro €

1,965,000,000

1,375,500,000

2,554,500,000

Profit

40,102,040.82

28,071,428.57

52,132,653.06

Profit in € = Revenues in $ / Exchange Rate - Total Variable Cost in €
Exchange rate 1.47 $ per €
The exchange rate at the end of November 2007 was 1.47 $ per €If Porsche bought one-year put options on the U.S. dollar on November 30, 2007, it would have been at a strike of 1.45$ per €
Using the exchange rate 1.47 $ per €
* Expected Profit = (2,947,500,000/1.47) - 1,965,000,000= 40,102,040.82
* Low sales Profit = (2,063,250,000 /1.47) - 1,375,500,000= 28,071,428.57
* High sales Profit= (3,831,750,000 /1.47) - 2,554,500,000= 52,132,653.06
b. Porsche hedges by selling forward US $ equal to the amount of expected 2009 sales with a 2 year forward contract;
 

2009

Sales price

$90,000

Variable Cost

60,000

Spot rate

1....