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?

Case: Hedging at Porsche BUSFIN 4255 International Finance Case: Hedging at Porsche BUSFIN 4255 - International Finance Due on: October 5, 2016 (before class) Getting the Case To acquire the case, please go to https://hbr.org/product/hedging-at-porsche/W04C40-PDF-ENG and purchase a copy of the case. Please ensure that you have the correct case. The title should be \"Hedging at Porsche\" exactly, and the product number should be \"W04C40-PDF-ENG\". Expectations Please read the case carefully and also take a look at the information provided in the appendix. Although the section on \"The Volkswagen Stake\" might be interesting, you are not required to read that section for this assignment. Analyze the questions below based on the information provided in the case and provide a detailed explanation of your answers. If you think that some important information is missing in the case, please make reasonable assumptions and state these assumptions explicitly in your writeup. Please work on the case in your group (as registered before). Presentation Slides and Write-Up Please create a set of presentation slides in which you address the questions given below. The presentation in class should be based on the slides submitted, so please make sure that the slides are really \"presentable\" (in terms of grammar, spelling, format, ...). To explain your results in more detail, please write an additional text that refers to the slides (this is the write-up). Probably the best way to do this is to use the \"add notes to slides\" feature that most standard software provides. Please answer the questions in the given order, and provide an introduction and conclusion slide. Please turn in a printed copy of your slides and the explanatory write-up (one per team) with all relevant information included. If you use the \"add notes\" feature, you can just print out everything by selecting \"Notes Pages\" in the printing menu (see the example slide attached). You cannot submit any digital files, so please include relevant spreadsheets etc. as appendix slides. The assignment will be graded both on content (correctness of answers and quality of explanations) as well as presentation of the contents. Presentations To successfully complete the case, students are required to attend the presentation session on Friday, October 7. I will email the teams that are selected for presentation until October 6 at noon. Nevertheless, all groups have to attend the session and should be able to present their solution. Case: Hedging at Porsche BUSFIN 4255 International Finance Questions 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? 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 the expected 2009 sales. Advice: In b), it should be possible to calculate the (fair) forward rate based on the information available in the case. In c), please assume a put option premium of 0.025 /$. It might be helpful (also to answer Question 3) to compare the strategies a), b), and c) by plotting the cash flows realized in 2009 as a function of the spot exchange rate in 2009, for all three vehicle sales scenarios. You should obtain a chart similar to Chart 1 below (of course, the actual green/blue/red lines may be different to the ones in Chart 1) for each of the strategies a), b), and c). 3. Based on your analysis of Question 2, what is 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? Case: Hedging at Porsche BUSFIN 4255 International Finance Chart 1: Example plot of cash flows in the three different vehicle sales scenarios for one of the different risk management strategies proposed in Question 2