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    Porshe Assignment

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    syed kamal
    Porsche's strategy of using options to acquire a stake in Volkswagen was a sensible risk management approach. [1] Using options allowed Porsche to purchase shares in Volkswagen if the price increased without paying more, which protected them from price fluctuations. [2] However, critics argued that Porsche had become more focused on speculative investments rather than its core automotive business, neglecting shareholders' interests. [3] There was a difference between management, who profited from speculative gains, and shareholders, who did not see direct benefits.

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    Porshe Assignment

    Uploaded by

    syed kamal
    847 views7 pages
    Porsche's strategy of using options to acquire a stake in Volkswagen was a sensible risk management approach. [1] Using options allowed Porsche to purchase shares in Volkswagen if the price increased without paying more, which protected them from price fluctuations. [2] However, critics argued that Porsche had become more focused on speculative investments rather than its core automotive business, neglecting shareholders' interests. [3] There was a difference between management, who profited from speculative gains, and shareholders, who did not see direct benefits.

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    Porsche's strategy of using options to acquire a stake in Volkswagen was a sensible risk management approach. [1] Using options allowed Porsche to purchase shares in Volkswagen if the price increased without paying more, which protected them from price fluctuations. [2] However, critics argued that Porsche had become more focused on speculative investments rather than its core automotive business, neglecting shareholders' interests. [3] There was a difference between management, who profited from speculative gains, and shareholders, who did not see direct benefits.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    847 views7 pages

    Porshe Assignment

    Uploaded by

    syed kamal
    Porsche's strategy of using options to acquire a stake in Volkswagen was a sensible risk management approach. [1] Using options allowed Porsche to purchase shares in Volkswagen if the price increased without paying more, which protected them from price fluctuations. [2] However, critics argued that Porsche had become more focused on speculative investments rather than its core automotive business, neglecting shareholders' interests. [3] There was a difference between management, who profited from speculative gains, and shareholders, who did not see direct benefits.

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    of 7

    ASSIGNMENT

    PORSCHE CASE STUDY

    NAME : ANAS SHAKIR

    MBA (1.5) Evening

    IM|Sciences PESHAWAR
    QUESTION 1

    Differentiate between speculation and risk management and the


    extent to which companies should hedge risks ?

    RISK Management: is done to avoid or minimize the level of risk. As the risk in
    derivatives are associated with price of underlying in the future, which is often
    uncertain. So, hedging is the way with which we can minimize the risk. Hedging is
    nothing but just protection from the risk in future. People who are risk aversor
    are involved in hedging.

    Speculation: while speculation on the hand is the process in which investors are
    involved to earn profit with handsome amount of risk associated with that
    increase or decrease in the future prices. Investor intentionally take the risk to
    earn the profit. Risk lovers are involved in speculation.

    Difference between Hedging & Speculation:

    Hedging Speculation
    Hedging is done to avoid the risk. Speculation is done to earn the profit
    against certain risk.
    Hedging is protecting the investment from While speculation the taking the risk in
    unforeseen change in price in future times. future price change to earn the profit
    against significant level of risk involved in
    the contract.
    Hedgers are risk averse people who want to Speculators are risk lovers who want to take
    eliminate or minimize the risk. risk to earn certain profit.
    As hedging secure the investors from the As speculators take the risk so, their
    risk and it minimize their potential gain in potential gain/loss are also high as well in
    future as well. the future.
    In hedging both short and long position can Also, in speculation both positions are
    be taken. involved as they are engaged with each
    other.
    Buying insurance is the example of hedging. Giving insurance is the example of
    speculation.

    Conclusion

    Hedgers reduce risk and reduce their expected rate of return in the future
    and for doing so they need to pay for it while speculators take risk in price
    fall and increase, and it may earn them high profit and loss in the future.

    As the core business of Porsche was not hedging it was producing cars so,
    each company should hedge to extent so their focus on the core business
    remain there and it may not be disturbed by hedging or anything else.
    QUESTION 2

    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?

    As Porsche revenues were mostly generating in US dollars and their cost were
    incurring in Euros and Porsche were facing the fear of falling dollars exchange rates
    in future so, to avoid the risk of falling exchange rate of dollar they hedge their
    foreign exchange exposure. As they were facing prices to fall they take short position
    in the contract. Porsche often used “at the money” option to contract on exchange
    rate closer to the spot rate.

    As shareholders want to increase the price of shares or dividend announcement to


    make capital gain and that hedging on foreign exchange did not impact the share
    price nor they announce extra dividend, so it does not make any sense from
    shareholders perspective whether they hedge the foreign exchange exposure or not.

    Yes, it would make sense from shareholder’s perspective if it would be done in


    1990’s when Porsche were on the edge of bankruptcy. As bankruptcy would lead the
    common shareholders to lose their wealth.

    It’s has no simple answer like yes or no it has two perspective as management want
    more profit so yes it makes sense in that sense because through hedging they have
    earned three times more than sales and its quiet handsome amount (4 billion €) which
    were three time more than Porsche annual sales of 1 billion. But it does not make
    any sense because their core business was not hedge fund their core business were
    selling sports car. If they would increase their sales the way, they have hedged the
    foreign exchange exposure it would be beneficial for them as well as for their
    shareholders.

    Yes, there is a potential difference in the interest of shareholders and management


    as shareholder may have objection on management that, they are taking extra risk
    on shareholder’s wealth. Also, they want to strengthen their core business not the
    hedging so, their share price may go up and ultimately their will wealth will be
    increased.
    QUESTION 3

    Do you think Porsche’s strategy of using options to acquire a stake in


    Volkswagen (instead of buying stocks directly) is a sensible one? Or
    do you agree with the critics who argued the Porsche was speculating
    with shareholders’ money and that it had become a “hedge fund” that
    neglected its core business?

    Once it would be announced in the market that Volkswagen share would be


    purchased by Porsche then definitely it would give market positive signal to market
    about Volkswagen stake and the price of their shares may go up. I think using option
    in such situation is sensible because if the price would go up by how much they
    would not need to pay extra for the shares. Yes, they could buy the shares directly
    for the first time but after that the price would go up and they have planned to
    purchase other shares of Volkswagen in future so using option in this case would be
    sensible one. if they would buy the first shares directly they could save the premium
    but on the other hand they were not aware of market reaction they share price could
    go down in the future because the Porsche was very small company in comparison
    to Volkswagen so that news of purchasing Volkswagen shares by Porsche may
    impact the share price negatively so the future was uncertain and using an option in
    such condition is sensible one.

    It’s simple answer could not be yes or no in case of critics review as, Porsche was
    selling cars outside Germany so, their mostly was coming from outside the country
    and they were exposed to the foreign exchange risk and in such conditions they
    could not afford the foreign exchange risk so they need to hedge their revenues
    but to the extent they can protect themselves from the risk. As I have already
    mention in question 1 that their core business was not hedging their core business
    was car business, so they need to focus more on that instead of hedging. Yes, I am
    agree with critics that they were speculating with shareholders wealth and
    management objective should be align with shareholder’s objective because they
    are agents of shareholders.

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