EFB312 Assignment-got 23.5/30 PDF

Preview

Summary

Maybe grade 5 ...

Description

Case Study EFB312-International Finance Assignment

Student name: Ming Deng Student number: n9824898

Part A 1. The Porsche foreign exchange hedging transaction and the acquisition of Volkswagen shares have had a significant impact on Porsche's profits. In addition, Porsche's profit through financial derivatives transactions is three times that of its automobile manufacturing and sales and foreign exchange hedging measures have also increased the profits of its core business. Therefore, Porsche has earned a reputation for prudent risk management, but it has also attracted criticism from analysts and commentators. The huge profits made by the company from financial derivatives transactions make many people wonder whether this is still an accurate description. People mentioned that companies like Porsche should not be engaged in derivatives transactions of this scale, because Porsche is more like a hedge fund than a car company. I disagree with these criticisms. Porsche’s hedging opportunities are the strength and driving force of the organization and as a strategic tool, it plays an important role in the speculation in the modern international financial market. It can effectively help Porsche avoid or minimize the risk of losing the company's competitive advantage, and this method can ensure Porsche's flexibility and long-term reliable profitability of its products. If Porsche doesn't hedge then they may have to suffer many financial losses such as decrease in value of investment, volatility in cash flows, financial distress would increase which will lead to high borrowing cost. Clearly shareholders wouldn't want decrease in their value or seeing loss in their investment, that's why they will support Porsche decision to hedge because it is important for them to recognize risk and hedging would be in interest of both firms. Although hedge funds are an arena for people with high risk tolerance and wealth, they can also be a tool for investors to diversify the overall risk in their portfolio. When referring to the concept of hedge funds, it is not emphasizing the asset target of the operation, but the investment strategy implemented. 2. When Porsche conducts business globally, it means that it is trading in the foreign exchange market, which will help set the value of foreign currencies, conduct international trade, and promote investment by helping currency exchanges. However, foreign exchange transactions will experience large fluctuations, which may be caused by various economic and political conditions, or macroeconomic factors such as interest rates, international trade, inflation and political stability. Due to the Covid-19 pandemic, Bank of America economists predict that COVID-19 will cause permanent losses in economic growth in the United States and Europe. Take America as an example, economy is forecast to contract 6.1% this year (The World Bank, 2020). If the company goes bankrupt due to the break of the capital chain, the unemployment of employees or the decrease in overall income will further reduce people’s desire to consume. In this case, the reduced desire to consume will further reduce the company’s income and profits, which becomes A vicious circle. In addition, The volatility in currency prices it gives rise to foreign exchange risk which means a Porsche in this case may suffer financial losses such as decrease in investment value, low cash flows, decreasing profits, These impacts may be huge, because unexpected exchange rate changes will greatly affect the company’s competitive position, just because exchange rate will change unfavourably before payment is made or received . This is why Porsche needs to hedge its foreign exchange exposure to balance risk. They can use future or forward contracts, option or other derivatives to protect themselves from volatility in currency prices. 3. The hedging strategy followed by Porsche is to hedge foreign exchange risk exposure and Porsche’s management has made future and forward contracts in the form of put option and

call options which used to lock the current spot rates for the future in order to hedge the foreign exchange rates. Porsche chose futures and forward contracts is a very smart decision, because these two are the best choice for hedging exchange rate risks. Its purpose is to effectively reduce the risks associated with Porsche in the next few years when the market has uncertain sales. The foreign exchange risk hedging strategy can help Porsche win competitiveness in the hedging currency market as well as avoid future market uncertainty and reduce foreign exchange exposure, hedge foreign exchange risk exposure also have the potential for longer-term higher returns. Weaknesses is harming the company and its ultimate goal, which are needed to be just conveyed by forward hedge. In addition, BMW's sales revenue continues to grow, but BMW realizes that its exchange rate often severely erodes its profits. Therefore, BMW has adopted a “natural hedge” approach to manage its foreign exchange exposure. The company attempts to match the currency of its operating income with operating expenses through natural hedges to offset any exchange rate effects to a certain extent. This can help the company to endure challenging market conditions, such as future market interest rate changes, currency exchange rate increases and inflation, thereby achieving the advantage of protecting traders from price fluctuations, while the company does not have to adjust daily fluctuations and waste time. The disadvantage is that for lowrisk investments, both in terms of investment amount and importance in the investment portfolio, although the risk is relatively low but the return is also small. Regardless of potential benefits, reduced risks will automatically translate into lower profits. 4. Due to ethical and economic considerations, the board of directors of listed companies in the United States strives to obtain more female directors (Deloitte, 2017). In Norway, the law requires that the board of each listed company must be composed of at least 40% of women, otherwise the company will bear the risk of possible dissolution (Westervelt, 2009). Many people think that the company’s exclusion of women is disrespectful and unethical, and companies should increase gender diversity to make society fairer. Germany has also begun to require companies to have at least 30% of female supervisory seats and has implemented a "female quota" policy to make women more respected and understood in society (Colitt, 2020). Research also shows that companies with 3 or more female directors, its organizational innovation capabilities are significantly higher than those of companies that have no female directors or only one or two female directors (Lückerath-Rovers, 2013). A survey of the UK trade report shows that diversification can improve the company’s overall return efficiency (Goyal, Kakabadse and Kakabadase, 2019). Women's perspective on business and understanding of the products are completely different with the men, and they have their own characteristics and sensibility in considering issues. Therefore, gender diversity is part of the company's sustainable development plan, which aims to support the company's continuous and more sustainable operations, especially by taking care of the interests of both men and women, the company is striving to maximize shareholder wealth. The decision to promote gender diversity not only is the right choice of organizational culture, but it can also bring better business results, increase in diversity may enhance the company’s creativity and innovation capabilities, and also leads to seriously affect and more smarter decision-making. (Deloitte, 2019).

5. Porsche should continue to challenge the systemic obstacles to opportunities and dignity for people of colour. Porsche conveyed this message in public: Porsche does not believe in

discrimination, and every customer should pay the same attention (Porsche, 2019). Fighting against racial inequality can not only improve the distribution of economic resources, but also create more opportunities to improve the economic strength and social status of economically disadvantaged groups. This is not only of social value, but also of economic value, because this will attract more people to participate in Porsche than their competitors and promote Porsche patriotism, thereby creating greater economic value for the target market. Although supporting the opening of opportunities to people of colour can improve the control and dignity of low-income people, but the economic advantages of upper-middle-class people will become limited. Porsche's main customers are aimed at high-end people, when resources flow downward, it means that Porsche's already solid advantages will be lost. Because meeting the needs of one community may eventually lose market share in another community. Therefore, Porsche’s opportunity to challenge the existence of people of colour relatively reduces the rights of target customers and increases the huge uncertainty in terms of profit.

Part B Expected Normal Volume Sales: 35,000 Vehicle Sold in Scenario 2 (Pandemic): 35,000x (1-50%) =17,500 Vehicle Sold in Scenario 3 (High Growth): 35,000x 120% =42,000 Average selling price per vehicle: $85,000 Variable cost per vehicle (Euro) 55,000 Shipping cost per vehicle (Euro) 3,000 Total of Variable + Shipping cost per vehicle (Euro) 58,000 Total of Variable + Shipping cost for all vehicles sold (Euro) Scenario 1 = 58000 * 35000= 2030000000 Total of Variable + Shipping cost for all vehicles sold (Euro) Scenario 2 = 58000 *17500 = 1015000000 Total of Variable + Shipping cost for all vehicles sold (Euro) Scenario 3 = 58000 *42000 = 2436000000

(1) Total Revenues: Scenario 1: 35,000 x $ 85,000= $2,975,000,000 Scenario 2: 17,500 x $ 85,000= $1,487,500,000 Scenario 3: 42,000 x $ 85,000= $3,570,000,000 a) Current spot exchange rate ($ per 1 Euro): Bid $1.11 /€ Ask $1.12 /€ Current spot exchange rate (Euro per 1 $): 1/$1.11= 0.9009 1/$1.12=0.8929 $2,975,000,000 x 0.8929= 2,656,250,000

b) Forward exchange rate assuming Euro as safe heaven ($ per 1 Euro): Bid $1.45 /€ Ask $1.465 /€

Forward exchange rate assuming Euro as safe heaven (Euro per 1 $): 1/$1.45= 0.6897. 1/$1.465= 0.6826 $2,975,000,000 x 0.6826= 2,030,716,724 2,030,716,724/2,656,250,000= 0.7645= 76.45% 1 – 0.7645= 0.2355 Then lower by 23.55% c) Forward exchange rate assuming $ as safe heaven ($ per 1 Euro): Bid $0.88/€ Ask: $0.9/€ Forward exchange rate assuming $ as safe heaven (Euro per 1 $): 1/$0.9= 1.1111 1/$0.88= 1.1364 $2,975,000,000 x 1.1111= 3,305,555,556 3,305,555,556/2,656,250,000= 1.2444= 124.44% 1 – 1.2444= 0.2444 Then higher by 24.44%

(2) a) Forward exchange rate ($ per 1 Euro): Bid $1.18/€ Ask$1.185/€ Euros per 1$: 1/$1.185= 0.8439 1/$1.18= 0.8475 Total Revenue: $2,975,000,000 x 0.8439= 2,510,548,523 The percentage gains/losses from hedging: (2,510,548,523-2,656,250,000)/ 2,510,548,523= 0.058= -5.8% Losses b) (2,510,548,523-3,305,555,556) / 2,510,548,523= -0.3166= -31.66% Losses (3) a) Option strike price €0.922 Option premium is €0.025 Total Revenue: $2,975,000,000 x (0.922-0.025) = 2,668,575,000 The percentage gains/losses from hedging: (2,668,575,000-2,656,250,000)/ 2,668,575,000= 0.0046= 0.46% Gains b) (2,668,575,000-3,305,555,556) / 2,668,575,000= -0.239= -23.9% Losses (4) Cash flows did not hedge：1,487,500,000 x 0.8439-1,015,000,000= 240,301,250 Hedged using forward contracts：1,487,500,000 x 0.6826 – 1,015,000,000 = 367,500 Hedged using option contracts：1,487,500,000 x (0.922 – 0.025) – 1,015,000,000 = 319,287,500 (5) Cash flows did not hedge：1,487,500,000 x 0.8439-1,015,000,000= 240,301,250 Hedged using forward contracts: 1,487,500,000 x 1.1111 – 1,015,000,000 = 637,761,250 Hedged using option contracts：1,487,500,000 x (0.922-0.025) – 1,015,000,000

= 319,287,500 (6) Cash flows are higher when hedged in Part B, hence hedging foreign exchange risk makes sense. For the business, there might be the risk in the future exchange rates, through prudent risk management and investment in non-volatile currencies that company can minimize the potential losses, and hedging will help them protect their finances from risk situations. Overall, it is a good policy to hedge porches’ currency exposure.

Reference: Colitt, R. (2020). Germany Targets Gender Gap with Quotas for Business and Politics. Retrieved from: https://www.bloombergquint.com/politics/germany-targets-gender-gap-withquotas-for-business-and-politics Deloitte. (2017). Women in the boardroom: A global perspective-5th edition. Retrieved from: https://www2.deloitte.com/content/dam/Deloitte/za/Documents/technology-mediatelecommunications/za_Wome_in_the_boardroom_a_global_perspective_fifth_edition.pdf Deloitte. (2019). Women in the board room: A global perspective-6th edition. Retrieved from: https://www2.deloitte.com/global/en/pages/risk/articles/women-in-the-boardroom-globalperspective.html Goyal, R., Kakabadse, N., & Kakabadse, A. (2019). Improving corporate governance with functional diversity on FTSE 350 boards: directors’ perspective. Journal of Capital Markets Studies, 3(2), 113–136. https://doi.org/10.1108/JCMS-09-2019-0044 Lückerath-Rovers, M. (2013). Women on boards and firm performance. Journal of Management & Governance, 17(2), 491–509. https://doi.org/10.1007/s10997-011-9186-1 Porsche. (2019). Code of conduct. Retrieved from: file:///Users/dengming/Desktop/Code%20of%20Conduct.pdf The World Bank. (2020). COVID-19 to Plunge Global Economy into Worst Recession since World War II. Retrieved from: https://www.worldbank.org/en/news/pressrelease/2020/06/08/covid-19-to-plunge-global-economy-into-worst-recession-since-worldwar-ii Westervelt, E. (2009). In Norway, Law Promotes Women In Boardroom. Retrieved from: https://www.npr.org/templates/story/story.php?storyId=111673448...