Assignment Questions: Hedging at Porsche

Mary Kate Simon

1) Why does Porsche hedge its foreign exchange exposure? Does it make sense, from the
perspective of shareholders, for Porsche to hedge? Does it make sense from
management’s perspective? Are there potential differences in interest between
management and shareholders regarding the hedging policy?

a. The reason Porsche hedges its foreign exchange exposure is because a company
that does business all over the world takes on currency risk and a way to combat
this is by reducing the volatility risk of another country. There can be more
certainty in volatility of another countries economy by using currency swaps and
future contracts.
b. It does make sense for shareholders to support the hedge because if there were to
be losses, the losses would not be as large reducing the risk that shareholders take.
Shareholders don’t want to see a loss on their investment which is why they
support the hedge.
c. It does make sense from the management’s perspective because it keeps cash
flows consistent and lowering financial risk. As Porsche’s treasurer says it is
impossible to beat the market.
d. Shareholders and management do have different interests as shareholders want a
safer and consistent cash flow. Management would have a more personal
connection with the company and are willing to take on more risk.

2) Suppose it is end of November 2007, and Porsche reviews its hedging strategy for the
cash flows it expects to obtain from vehicle sales in North America during the calendar
year 2009. Assume that Porsche entertains three scenarios: The expected volume of
North American sales in 2009 is 32,750 vehicles. The low-sales scenario is 30% lower
than the expected sales volume, and the high-sales scenario is 30% higher than the
expected sales volume. Assume, in each scenario, that the average sales price per vehicle
is $90,000 and that all sales are realized at the end of November 2009. All variable costs
incurred by producing and shipping an additional vehicle to be sold in North America in
2009 are billed in € and amount to €60,000 per vehicle. Characterize how Porsche’s €
cash flows, net of variable costs, obtained from its North American sales depend on the
spot exchange rate that prevails at the end of November 2009, if:
a. Porsche does not hedge its currency exposure at all;
b. Porsche hedges by selling forward US$ equal to the amount of expected 2009
sales with a two-year forward contract;
c. Porsche hedges by buying two-year European at-the-money put options on US$
(providing to Porsche the right to sell US$, receiving €, at the strike exchange
rate) in sufficient quantity to have the right to sell an amount of US$ equal to
expected 2009 sales.

3) Based on your analysis of question 2, what’s your view on the foreign exchange hedging
strategy and the hedging instruments chosen by Porsche? If you were Porsche’s CEO,
would you implement a different strategy? If yes, why? If no, why not?
4) How might Porsche’s ownership structure influence the hedging strategy pursued by
management?

a. Porsche’s ownership structure was that of two classes of shares: Ordinary with
voting rights (held entirely by insiders) and nonvoting rights which were publicly
traded. Because of the distinction between these two classes of shares, the insiders
had the ability to person this hedging strategy without the risk of direct negative
effects from their shareholders such as being voted out as a board member
because the publicly traded shares were non-voting.

5) Do you think Porsche’s strategy of using options to acquire a stake in VW (instead of

buying stocks directly) is a sensible one? Or do you agree with the critics who argued that
Porsche was speculating with shareholders’ money and that it had become a “hedge
fund” that neglected its core business?

a. When Porsche initially announced it would be taking a stake in Volkswagen, it

would be clear that the share price would rise substantially making it more
difficult to acquire the ownership they desired because of the fluctuating price and
the rising valuation. This is why Porsche’s use of options in this situation was
warranted and sensible because regardless of the price changes, the options would
provide a clear cost (the premium) for the shares they want to acquire. However,
the company’s core business was selling cars and they are liable and responsible
to their shareholders. While the options gave them the ability to hedge some risk,
if this was unsuccessful, they would destroy shareholder value, thus this
speculation itself was a risk on situation.