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Bmw: Currency Hedging 2007

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Bmw: Currency Hedging 2007
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

International Investment and Portfolio Management

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

International Investment and Portfolio Management

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
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