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Briefly describe Porsche s foreign exchange risk exposure. Should Porsche hedge its foreign exchange risks? 2 . Suppose it is the end of July 2

Briefly describe Porsches foreign exchange risk exposure. Should Porsche hedge its foreign exchange risks? 2. Suppose it is the end of July 2007 and Porsche reviews its hedging strategy for the cash flows it expects to obtain from vehicle sales in North America during the fiscal year ending in 2009. Assume that Porsche considers the following scenario: The expected volume of North American sales in 2009 is 20,000 vehicles. The average sales price per vehicle is USD 100,000 and all sales are realized at the end of July 2009. All variable costs incurred by producing and shipping an additional vehicle to be sold in North America in 2009 are billed in EUR and amount to EUR 63,000 per vehicle. The spot exchange rate at the end of July 2009 is EUR 0.7/1USD. Assuming different spot exchange rates characterize (a chart is sufficient) how Porsches EUR cash flows, net of variable costs, obtained from its North American sales depend on the spot exchange rate that prevails at the end of July 2009, if: a. Porsche does not hedge its currency exposure at all; b. Porsche hedges its currency exposure by selling a USD forward contract at a forward rate of EUR 0.65/1USD for the amount of expected 2009 sales with a time to maturity of two years; c. Porsche hedges its currency exposure by buying a European put option contract with two years to maturity on USD (providing Porsche the right to sell USD, receiving EUR, at the strike exchange rate of EUR 0.65/1USD) in sufficient quantity to have the right to sell an amount of USD equal to expected 2009 sales. Assume the premium for the put option is EUR 50,000.A chart showing the net cash flows under a. b. and c. is enough. 3. Assume that Porsche considers an alternative scenario to the scenario described in question 2: A low-sales scenario with 30% lower than the expected sales volume. Everything else remains the same as in question 2. Assuming different spot exchange rates briefly characterize (a chart is sufficient) how Porsches EUR cash flows, net of variable costs, obtained from its North American sales depend on the spot exchange rate that prevails at the end of July 2009 under this alternative scenario, if: a. Porsche does not hedge its currency exposure at all; b. Porsche hedges its currency exposure by selling a USD forward contract at a forward rate of EUR 0.65/1USD for the amount of expected 2009 sales from question 2(and not the sales in the low-sales scenario) with a time to maturity of two years; c. Porsche hedges its currency exposure by buying a European put option contract with two years to maturity on USD (providing Porsche the right to sell USD, receiving EUR, at the strike exchange rate of EUR 0.65/1USD) in sufficient quantity to have the right to sell an amount of USD equal to expected 2009 sales from question 2(and not the sales in the low-sales scenario). Assume the premium for the put option is EUR 50,000 Again, as in question 2, a chart adding this additional scenario is enough. Can you create charts for questions 2 and 3 parts a,b,c and show the calculations. This is based on the 2015 Porsche case study

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