Assignment

Porsche 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 managements 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 2009is 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 Porsches 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, whats your view on the foreign exchange
hedging strategy and the hedging instruments chosen by Porsche? If you were
Porsches CEO, would you implement a different strategy? If yes, why? If no, why
not?

4) How might Porsches ownership structure in influence the hedging strategy

pursued by management?

5) Do you think Porsches 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?