Question

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 managers and shareholders regarding the hedging policy?

Answer 1

Answer:

Porsche hedges its foreign exposure to prevent it from the volatile currency market.

Hedging makes sense from the shareholder's perspective.

Hedging makes sense from the management perspective

The potential difference in interest between management and shareholders on the hedging strategy exists.

Explanation:

- Porsche hedges their foreign exposure to prevent it from the volatile currency market. The foreign operations of Porsche from the overseas implies that it has to convert its currencies to various denominations to US Dollar. so it faces the translation, economic and transaction exposure due to the fluctuating currency markets and exchange rates. In such a case, the Porsche has to hedge foreign exposure by using currency swaps or future contracts to ensure the loss from currency exchange is minimized.

- Yes, it makes sense from the shareholder's perspective to hedge because it protects the earnings of the company since the shareholders want their earnings to be maximized.

- Yes, hedging makes sense from the management perspective. The management are the agents of the shareholders and thus try to pursue hedge strategy on behalf of the shareholders to ensure the earnings are protected and losses due to currency exposure are minimized.

- There exists differences in interest between management and shareholders on the hedging strategy. The potential difference in interest between the shareholders and the management is due to the risk level.