Bmw: Currency Hedging 2007

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INTERNATIONAL INVESTMENT AND PORTFOLIO MANAGEMENT

BMW: Currency Hedging 2007

BY AJAY BANSAL, VAIBHAV SINGH, VIJAY VERMA, TANMAY JAIN, LU YOU, SEBASTIAN DOMINITZKI

Background
2

Revenue Growth in 2007:

14,3%

€56,018 Million

1,500,678 BMW, MINI and Rolls-Royce brand cars were sold
during 2007 (9.2% increased)
>25% of sales take place in US
Crisis in US Credit Market adverse impact on the share
prices of European exporting companies BMW common
stock: 2.7% drop
US dollar dropped to 1.50 US$/€ in 2007
International Investment and Portfolio Management

Main Issues
3

Positives

Negatives

Sales Increase

Weakness of
the US dollar

Efficiency
Gains

High cost of
raw
materials
Less
favorable
financing
conditions

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Foreign Currency Exposure?
4

BMW (in millions of dollars)

2008
360.000
36.000
12.960

2009
360.000
36.000
12.960

North American Production Volume
North American Average Production
Price

140.000

160.000

35.000

35.000

North American Cost share per unit
North American Variable cost
North American Fixed cost

0.65

0.65

31.85
2.500

36.40
2.500

Net revenue exposure

7.275

6.820

North American Sales Volume
North American Average Price
North American Revenue

International Investment and Portfolio Management

Foreign Exchange Rate
Exposure Management

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Hedging Instruments

• Match locally
generated
generated revenues to
local costs
• Reduce net exposure
to currency
movements

International Investment and Portfolio Management

Currency
Currency Hedging

Natural
Natural Hedging

6

• Forward Contracts
• Obligation to carry
out the transaction
• Zero-Cost Options
• Out of the money
options
• Capped Upside
• Some level of
protection
sacrificed

Hedging Instruments
7

0.15
0.10

Zero Cost Option Payoffs vs US $/€
spot rate

0.05
0.00
1

1.05

1.1

-0.05
-0.10
-0.15
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1.15

1.2

1.25

1.3

1.35

Hedging Strategy
8

• Cascading Strategy
• ‘unhedged cover’ hedged through roll over
process
• Fair value range (1.15 to 1.17$/€ currently) can
change from year to year

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Management

Hedging Strategy
9

Percentage of Estimated Exposure/year
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%

90-100%

75-66%

33-25%

1

2

3

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Hedging Strategy
10

Current Strategy
USD strengthens – Long term contracts
USD weakens – Short term contracts

Is it appropriate?

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Alternatives
11

Forward/Futures
Call/put option
Long Call & Short Put
Currency ETFs
Operational Hedging
Cross currency swaps

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Questions?

International Investment and Portfolio Management

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