A Report On The Company

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During the early 2000’s European carmakers were hit hard by the rising Euro and the weak dollar. European carmakers pay for car parts and labor in euros to build cars they export to the United States where customers pay for the cars in dollars. As the dollar weaken manufacturers faced fewer Euros worth of revenue for each dollar sale. They faced raising the price of the cars to compensate the weak dollar or absorbs the difference in lower prices. The purpose of this paper is to show that hedging the exchange rate to profit in swings in the market was very profitable or Porsche however not vey sustainable low term.
The background of Porsche needs to be reviewed before delving into their foreign exchange hedging. Ferdinard Porsche founded
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According to Goldman Sachs it was “estimated that as much as 75% of the company’s pretax profits-or up to 800 million ($1.07 billion) of the 1.1 Euro Porsche reported-came from skillfully executing currency options (Eun, Cheol S., and Bruce G. Resnick, 238)”. Porsche was said to be fully hedged through 2007 which is a term used to attempt to eliminate risk of a unfavorable price changes of an asset by taking an offsetting position in another asset, usually a derivatives contract. When VW stock prices increased and Porsche realized a gain on their option contract, they used the gains to purchase more shares. So Porsche would increase stake in Volkswagen causing the price of VW shares to rise to a level that it wouldn’t make any sense for Porsche to purchase VW shares. Seeing this caused other hedge funds to sell shares of VW.
According to an article in the Economist called Squeezy Money, “Porsche could make billions by squeezing short-sellers of VW’s share (1). A short sale is when a trader sells shares it doesn’t own hoping to re-purchase the shares later at a lower price. Porsche owned 43% of VW shares and had derivate contracts on nearly 32% more. This meant that Porsche had tied up almost all the available shares of VW that was not held by the state government and index funds. It was apparent to other hedge funds that they would be forced to buy shares at any price or feel the squeeze. Many market watchers suspect that major financial

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