Question

Do you think Porsche would benefit from foreign exchange hedging in today’s uncertain times due to Covid-19 pandemic? Note: Clearly explain the potential benefits and risks

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Answer 1

Yes I do think that Porsche will be gaining from hedging into the foreign exposure at the time of the Global pandemic-

A. This company is having risk exposure across the Asia and Europe and when there will be a weakness of the currency of Asian Markets and European markets it would be leading to overall reduction in the receivable of Porsche and it will be meaning that the company is going to have lesser receivables and it can be hedged through for an export exposure.

B. At the time of the Global pandemic, there has been a weakness in the emerging market currency as it can be seen that the emerging market currency has weakened against the dollar index and it would be leading to lower receivables of the Company against strengthening of the dollar index and the company should be trying to hedge its exposure

C. There are also risk associated with hedging in foreign exchange because when they would be lower movement of currency then it will be meaning that the cost of foreign exchange hedging would be a loss to the company because it is an additional cost which will not be yielding into any benefit for the company because there was no depreciation of the currency and no reduction of the exposure so this will be leading into excessive cost for the company which is reducing the profit.

So,Due to the volatility and the uncertainty arising out in the global economy as unfolding of the coronavirus has happened, there is a shift of economic cycle and risk of impending recession, so these multinational companies should be trying to hedge their exposure by having exposure into derivative and other hedging instruments which will be leading to securing their receivables and strengthening the overall books of accounts so that they should be protected against major downside of various currencies and other risks associated with the macroeconomy in the Global Arena.