Hedging at Porsche Case Solution
From a management point of view; the hedging strategy is of little importance, as Porsche once believed that it should protect its exchange rate risk and that exchange rate risk is not dependent on future exchange rates and its development should be a part of management at Porsche. The advice is to avoid the financial pitfalls because you can never beat the market.However, hedging financial risks also serves the long-term interests of Porsche’s management to a larger extent, as it saves the company from incurring massive losses and facing bankruptcies. The management is looking for the type of safe work and generous bonuses that are only possible if the business flourishes and operates well in the time of rapid changes. Therefore, we can conclude that the interests of shareholders and the management are different in terms of Porsche's hedging policy.
Hedging Strategy
The hedging strategy of Porsche is to hedge its exposure to FE. The company’s executives signed these agreements as put and call options. In this situation, the company has an other choice which was the money market choice, as it could beused in the future to block the current spot exchange rate to protect the risks involved in the fluctuation of the exchange rates. Hedging strategies can be evaluated to reduce the risks associated with the foreign exchange hedging. This event help the businesses to reduce their financial difficulties, thereby increasing the need for external funding against the objections of the business owners.The forward and futures agreements are the best choice for hedging against the exchange rate risks, with the aim of reducing the risks related with Porsche in the upcoming years when sales are uncertain. In both the options, Porsche can protect its foreign exchange market to avoid the ambiguity about its future sales in the US.
When the U.S. dollar is stronger than expected, deficiencies can damage the business and its ultimate purpose, which is an issue that needs to be communicated through the future hedging transactions. If the normal transaction is larger than the actual transaction then Porsche will be compatible. The two technologies are comparable. The hedging option allows you to keep a strategic distance from costly corporate defaults and obstacles, and the expected transaction is greater than the actual transaction. The unfortunate result is again due to the coverage of foreign trade. Porsche recommends that in order to maintain a strategic distance from external financing and financial difficulties; it is ideal to avoid disadvantages.
Analysis of Strategy
Based on the quantitative analysis; the hedging strategy appears to be a good strategy to hedge the Porsche's foreign exchange risk, as the total gain from the use of options and future strategies exceed the total gain. In addition to this, during the pandemic; there are uncertainties about the currencies, i.e. the euro (€) and the US dollar ($) being safe haven; therefore, if the price is $ 1.18, the trading volume would be 42,575 vehicles and the profit would be $ 1,829,022,000; if not, tap $ 1.84 trading reduces it to $ 378,262,500 and the number of vehicles would be 22,925. Collateral is an essential way of reducing the risks. The hedging transaction is of great benefit to Porsche, so the company is advised to hedge against.
What they should have done
Porsche’s ownership structure can influence the management’s hedging strategy in several ways. First, if a majority of independent directors in Porsche’s board of directors oppose the company’s aggressive hedging strategy then the company might have to withdraw its hedging strategy and reduce its hedging ratio. Second, a conflict of interest was been witnessed in the past, as the company had invested in Volkswagen’s stock options instead of buying shares directly from its own company. Therefore, hedging strategies protect against the financial risks that will harm the company and its shareholders in the upcoming years due to the devaluation of dollar against euro.
If the U.S. dollar is high, then the options could not be used for hedging purposes. Therefore, the cash flow would be equal to the uncovered cash flow, but the purchase of the option contract would have the lowest cost. If the U.S. dollar weakens; the cash flows will be similar to the future hedging transactions, and again, the call options would have the lowest cost.
The widespread use of options is intended to minimize the risk of incurring losses in future. In addition to this, you can increase the return on your investment portfolio and enjoy the additional profits...............................
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