Porshe case :
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?
Porsche decided to hedge its foreign exchange exposures as during around 1990 the
company was hit by the crisis and despite being hit by these crises the banks were unable or
unwilling to extend or offer them credit. Porsches also decided to hedge the foreign
exchange exposures to evade a lot of loss which was resulting from the falling of the
American dollar. The company had faced a lot of troubles from their experience before they
decided to adopt hedge of their exposures of the foreign exchange. If Porsche don’t use the
hedge option it will face the financial distresses during the year because in this case study it
mentions that the U.S. dollar rate will be fallen. Because the company major portion of sale
volume is from U.S. and company records its cost in the euros.If we look at exhibit 1 in the
case, then we can see the upward movement of the exchange rate between US to Euro and
thus this means a weakening of the US dollars against the Euro. By locking in with put
options with a floor, Porsche would be able to get a minimum amount of the Euros per each
US dollar the company earns in America and then these US dollars could be easily converted
to Euros at the specified exchange rate. This would mean that Porsche would be secure
against the foreign exchange exposure and it could limit the losses that it faced in the 1990s.
The hedging strategy had grown rapidly in 2007 and it generated huge profit margins for the
company as shown in exhibit 1 in the appendix.
From the perspective of the shareholders, it makes sense that Porsche should hedge its
foreign exchange exposure because of the bankruptcy situation that had been faced by the
company in 1990s. Therefore, hedging the financial exposure to save the investment of the
shareholders and maximizing the wealth of the shareholders is the ultimate objective of
Porsche and this hedging strategy makes sense from the perspective of the shareholders.
From the perspective of the management, the hedging strategy makes little sense, as
Porsche had believed that it should be hedging its foreign exchange risk irrespective of the
future rate developments the management of Porsche might have. The aim of the board was
to avoid the financial trap, as it is never possible to beat the market. However, to a major
extent, the hedging of the financial exposure would also be in the long-term interests of the
management of Porsche, as it would save the company from huge losses and bankruptcy.
Management would be looking for this secure jobs and hefty bonuses, which is only possible
if the company grows and performs well even in the volatile times. We can conclude that the
interests of the shareholders and the management are different with respect to the hedging
policy of Porsche.
