Should Porsche hedge its foreign exchange risks?

Porsche’s foreign exchange risk exposure is heavily

influenced by the U.S. dollar,with a large share of sales occurring in the United States, while
production takes placein Europe, with costs largely in euros. When looking how Porsche’s
competitors dealwith risk, Porsche’s competitors such as BMW and Mercedes use “natural
hedges” (inaddition to their financial hedges): They both have production facilities in the
U.S.Porsche is unable to do this because their small scale likely makes this infeasible. Porsche’s hedging
Porsche should hedge because reducing risk intuitively seems the right policy. Ifshareholders
can hedge and diversify themselves and there are no costs of financialdistress and other frictions,
hedging does generate shareholder value. There are plausible deviations from this frictionless
benchmark that could apply inPorsche’s case. One possibility involves the costs of financial
distress. For a luxurycarmaker, financial distress could involve, among other costs, a
substantial loss ofreputation and customer trust. Porsche could also reasonably be worried about
costs ofexternal financing in a distressed state. Its near-distress experience in the early
’90sprovides an illustration of these concerns. Hedging can generate value if it helps avoidsuch
costs. But it is important to keep in mind that the value generating does not comefrom risk reduction
per se, but from a reduction in the ex-ante cost of frictions. Another aspect is that these hedging reasons
provide motivation to hedge (extreme)downside risk, but they do not provide much motivation to hedge
other types of risks. Porsche is largely a family-owned company. For the two families, the Porsches
andthe Piëchs, the stake in the company accounts for a large fraction of their wealth. Thislack of
diversification combined with the families’ risk aversion implies a desire to reducethe risk of Porsche. As
controlling owners, the families might also be concerned that ifPorsche faced financial difficulties, an
outside equity infusion could be necessary, whichcould dilute the families’ control of Porsche