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In: Finance

5. Porsche is expected to sell approximately 60,000 cars in the U.S. in 2019. I'll let...

5. Porsche is expected to sell approximately 60,000 cars in the U.S. in 2019. I'll let you estimate an average selling price across Porsche models. For this example, let's assume that all the sales happen in December of 2019. Also, assume that Porsche has fully hedges their U.S. dollar exposure (based on predicted sales) using futures or forward contracts at a rate of $1.10 per Euro. What happens in the following situations:

a. the Dollar/Euro exchange rate remains unchanged and sales are as predicted

b. the Euro rises against the Dollar and the exchange rate moves to $1.00 per Euro. Sales are as predicted.

c. the Euro falls against the Dollar and the exchange rate moves to $1.25 per Euro. Sales are as predicted.

d. the Euro rises against the Dollar and the exchange rate moves to $1.00 per Euro. Sales are 20% higher than expected.

d. the Euro rises against the Dollar and the exchange rate moves to $1.00 per Euro. Sales are 20% lower than expected.

Solutions

Expert Solution

lets assume that average selling price across porsche modes is $ 10000

porsche have U S dollar exposure so long on us dollar and short on Euro.

to fully hedge they have taken short position on US dollar and long on Euro.

a

total exposure in us dollar is 60000*$10000 = $600000000

now in forward market company will receive @ $1.1 per euro so $600000000/1.1 = 545454545.5 euro

b.

total exposure in us dollar is 60000*$10000 = $600000000

now in forward market company will receive @ $1.1 per euro so $600000000/1.1 = 545454545.5 euro

value is current market is @ $1 per euro so $600000000/1. = 600000000. euro

depreciation of US dollar not effect on company because they loss on cash market is Euro 54545454.5  same as loss of Euro 54545454.5  on forward market.

c.

total exposure in us dollar is 60000*$10000 = $600000000

now in forward market company will receive @ $1.1 per euro so $600000000/1.1 = 545454545.5 euro

value is current market is @ $1 per euro so $600000000/1.25 = 480000000. euro

depreciation of US dollar not effect on company because they loss on cash market is Euro 65454545.5 same as profit Euro 65454545.5 on forward market.

d.  total exposure in us dollar is 60000*1.20*$10000 = $720000000

hedged exposure is $600000000. unhedged is $ 120000000

value is forward market is $600000000/1.1 = 545454545.5 euro

value is cash market is $720000000/1 = 720000000 euro

lass on forward market is $600000000/1.1 = 545454545.5 euro - 600000000 euro=   Euro 54545454.5

profit in cash market is Euro 54545454.5 + 10909090..91 euro additional from unhedged position

jeff jeffy answered 5 months ago
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