On 28 October 2008, the price of Volkswagen common shares surpassed EUR1,000. The case intends to explain this apparent marketplace distortion using logical arguments such as the tentative takeover of Volkswagen by Porsche and also the role of derivatives, particularly delta hedging. Although the events in the case did occur (the unusual stock price reaction), the storyline is just fictional and exemplifies the series of events in the day of an investment bank requested by a Porsche executive to underwrite call options on Volkswagen shares. Mark Johnson, managing director of a midsized NY-based investment bank, (and proud owner of a Porsche) receives a phone call from Anne, former classmate at Cal Tech and now a senior executive at Porsche, the German car manufacturer. She inquires Mark whether his investment bank would be willing to underwrite some call options. Mark asks his team of specialists to look into the details. Is Anne calling Mark? What is behind this unusual offer? Are not there banks located in Germany? Diverse characters are initiated to give dissimilar views on the rationale behind the option pricing activity. The case presents a distinctive learning opportunity since it joins significant teaching and academic objectives (option pricing, dynamic replication and delta hedging) with other topics such as fast cars like Porsche as well as the ramp-up in the cost of Volkswagen stock.
Learning objectives: The case is based in 2008 and deals with the tentative takeover of Volkswagen by Porsche and also the function of derivatives (and delta hedging) in contributing to the unusual price reaction of Volkswagen's stock. It presents a unique learning opportunity since it joins significant teaching and academic goals (option pricing, dynamic replication and delta hedging) with other matters such as quick cars like Porsche as well as the ramp-up in the price of Volkswagen stock from EUR34 to more than EUR1,000 per share at one stage during the interval that the case assesses. The case has been designed to help participants understand that esoteric matters including delta hedging and dynamic replication are really the bread and butter of contemporary investment banking instead of an academic abstraction. It gives some insight into the practices of investment banks (or any other financial institution) and reveals how they can impact consequences. The assignment questions in the teaching note may be fairly basic, but the insights that are gained into hedging and option pricing are extremely profound.
THE VOLKSWAGEN SHORT SQUEEZE Case Study Solution
PUBLICATION DATE: October 08, 2012 PRODUCT #: IMD568-HCB-ENG
This is just an excerpt. This case is about LEADERSHIP & MANAGING PEOPLE
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