Hedging At Porsche Harvard Case Solution & Analysis

Hedging At Porsche Case Study Analysis

Question 2

1. By assuming that the Porsche’s management team has decided to hedge using forward contracts and the expected final volume of sales is 35,000, and the exchange rate (bid-ask) remains at $1.11/€ - $1.12/€; the total revenues are calculated by sales price in €71729.96 by the sport rate of buying in €0.847 and multiplying with the sales volume of 35000; hence, resulting in the total revenue of $2,962,447,257. The total benefits / costs is calculated by deducting the total revenues, calculated by using forward hedge from the total revenues calculated without using any hedging strategy; hence, resulting in a benefit in amount as well as in percentage, i.e. $14,009,757 and 48 percent, respectively.

1. By assuming that the investors consider the US dollar to be a safe haven currency during the pandemic; the total revenues are calculated by sales price in €71729.96 by the sport rate of buying in €0.847 and multiplying with the sales volume of 35000, hence resulting in the total revenue of $2,962,447,257. The total benefits /costs are calculated by deducting the total revenues calculated, using forward hedge from the total revenues calculated under the condition that the US dollar is a safe haven currency during the pandemic; hence resulting in benefit in amount and in percentage, i.e.$53,558,368 and 1.84 percent, respectively.

Question 3

1. By assuming that the exchange rate (bid-ask) remains at $1.11/€ - $1.12/€ and the expected final sale of $35000 under the option contracts strategy;the total revenues are calculated by sales price in €78,341.01 by the sport rate of buying in euros of €0.922 and multiplied with the sales volume of 35000, hence resulting in the total revenue of $2,975,000,000. The total benefits/costs are calculated by deducting the total revenues which are calculated using option contracts strategy from the total revenues that are calculated by using no hedging, hence resulting in the amount and percentage of $26,562,500 and 0.90, respectively.

By assuming that investors consider the US dollar a safe haven currency during the pandemic; the total revenues are calculated by sales price in €71729.96 by the sport rate of buying in  €0.847 and multiplied with the sales volume of 35000, hence resulting in a total revenue of $2,962,447,257. The total benefits/costs are calculated by deducting the total revenues calculated by using option contract from the total revenues calculated under the condition that the US dollar is a safe haven currency during the pandemic, hence resulting in beneficial amount of $66,111,111and 2.27 percent.

Question 4

By assuming that the Scenario 2 (Pandemic) took place in 2020, and Euro became a safe haven currency during the pandemic; if you did not hedge;the cash flow amounts$15,750,000, hedged using forward contracts amounts $289,800,000 and hedged using option contract samounts $386,225,000. The total cost in dollar is calculated by multiplying cost in Euro by exchange rate of $1.45 with no hedge, $1.18 with forward hedging strategy, $1.085 with option contract strategy, resulting in the total costs of $84100, $16,560 and $22,070. The total profit is calculated by multiplying the profit per vehicle by taking half percent of the North America’s expected sales volume of 35,000 vehicles in 2020.

Question 5

With the assumption that the Scenario 2 (Pandemic) took place in 2020, and the US dollar became a safe haven currency during the pandemic; the cash flows if you did not hedge, amounts $594,300,000, hedged using forward contracts amounts $289,800,000 and hedged using option contracts amounts $386,225,000. The total profit is calculated by multiplying the profit per vehicle by taking half percent of North America’s expected sales volume of 35,000 vehicles in 2020.

Question 6

On the basis of the quantitative analysis; the hedging strategy seems to be a good policy to hedge the Porsche’s currency exposure on account of the reason that the total profit using option contract and forward strategy is higher as compared to the total profit calculated with no hedge. In addition to this, there is an uncertainty regarding Euro (€) &the US dollar ($) a safe haven currency during the pandemic, due to which if the exchange rate would be $0.88 and the profit would be $594,300,000; otherwise, it would be reduced to $15,750,000 at the exchange rate of $1.45. Hedging is the fundamental mode of reducing risk; the hedging would significantly benefit Porsche due to which the company is advised to hedge the exchange currency exposure.(Kenneth A. Froot, 2015)...................................

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