4.3 Risk identification and current control applied by Porsche
4.3.2 Financial risk identification and control by Porsche
As the United States and United Kingdom are Porsche’s most important sales market outside the EURO-area, everybody would expect that Porsche would be highly exposed to fluctuations of the Euro/US Dollar and Euro/UK Pound. However, none of these currencies is significant at the 5% significance level. This implies that Porsche’s current hedging strategy is effective in reducing exposure to volatility of these two currencies. The US dollar and UK pound have a positive beta while the Chinese Yuan has a negative beta. This difference could be explained by reasoning that some parts are sourced from China. A devaluation of the Chinese Yuan in comparison to the Euro would than imply that sourcing from China would become cheaper, which would have a positive effect on Porsche and its revenues. Furthermore, table 36 also shows that the German government bonds, so the interest rates have some influence on Porsche.
Especially, the 2 and 5 year bonds explain according to the R2, 18.3% and 16.7% respectively, the variation in Porsche’s stock. From the table 36 we can also read that the impact of changes in the interest rates on Porsche’s stock increases in line with maturity of the governmental bond, shown by increasing Beta. The last point I would like to mention regarding the regression analysis is that the change in oil prices doesn’t affect Porsche’s share price (sales), which can be explained by the brand positioning for high end clients.
4.3.2.2 Financial risk treatment
After having done regression analysis and looked into Porsche’s exposure to interest rates and currencies I will now look into the strategy Porsche applies to offset these exposures.
Although Porsche is well known for its active hedging management, only limited detailed information is made public by Porsche.
The first issue is whether Porsche uses its risk management for speculative purposes, as is sometimes suggested in the press. A quote from such a source: “Porsche revealed it earned three times as much money from trading derivatives as it did from selling cars, prompting accusations it was acting more like a hedge fund.”95 This fact has been proved on October 26th 2008, when Porsche revealed its holding in Volkswagen which was accomplished by the complicated derivatives based strategy. The holding included 42.6 percent direct stake plus options for another 31.5 percent. This put Porsche 1 percentage point shy of the goal of 75 percent set on
95 http://blog.foreignpolicy.com/node/7027 12.04.2008
March 3rd 2008. On March 28th 2008 Volkswagen briefly overtakook Exxon Mobil Corp. as the world’s most valuable company at 296 billion euros market capital as short-sellers seek shares to cover wrong-way bets that the price would fall. Porsche says the following day that it may settle as much as 5 percent of its options contracts to increase the supply of shares and stabilize the price.96
Porsche underlines that the exclusive goal of Porsche’s risk management is to hedge risk and that possible gains can be ascribed to windfall gains. Porsche therefore states that they are not involved in speculative transactions. According to the annual report (2006/2007) Porsche’s hedging strategy objective is to minimize the risk resulting from current receivables, liabilities and debts as well as from highly likely future transactions.
The main focus of the company’s currency hedges is on the US Dollar, UK Pound and Japanese Yen. Analyses show that Porsche has a big supplier located in Japan - Aisin Aw, the only relevant supplier outside the Euro-Area, from which they yearly source goods worth between 7 to 9 billion Japanese Yen (approx. 44 million – 66 million Euro).97
Porsche hedges its currency and interest rate risk by making use of financial derivative instruments. An interesting point to mention is that Porsche has currency hedges with lifetimes of six years for the US Dollar exposure, while other currency exposures are often hedged by instruments with lifetimes shorter than four years. This makes sense when one looks at the importance of the US dollar in the total exposure of Porsche. Porsche states that its hedging strategy and, especially, its use of the so called “combined options” are superior to the strategies of its competitors. This gives Porsche a competitive advantage, which is why Porsche does not describe its hedging strategy in detail.98
Along with financial derivative instruments, Porsche also makes use of natural hedges. As mentioned earlier, Porsche receives a large cash inflow in US dollars. To counter this exposure, Porsche had, at the end of 2006/2007, outstanding US bonds with a nominal value of 625.000 US Dollar. Furthermore, Porsche raised 1 billion US Dollar of hybrid capital in January 2006. The
96 http://www.bloomberg.com/apps/news?pid=20601170&sid=aoOxJ_Y213uY 04.08.2009
97 Mayr B., Muler T.: Porsche’s Management of Foreign exchange risk, International Finance class 2007/2008 Group 15at Erasmus University Rotterdam
98 Mayr B., Muler T.: Porsche’s Management of Foreign exchange risk, International Finance class 2007/2008 Group 15at Erasmus University Rotterdam
investors will be paid in US dollars. These actions are used to try to compensate for the big cash inflow of US Dollars.
In countries where the sales are relatively low and where Porsche has no affiliates, customers (wholesalers or retailers) are billed in Euros. This means that the currency risk is transferred to the customer. In countries with relatively high sales, the company sets up wholly owned subsidiaries that import and sell the products to car retail dealers. Porsche has wholly owned trading subsidiaries in United Kingdom, Spain, Italy, France, USA, Canada, Japan, Australia and Russia. These subsidiaries keep their books in their local currency, which transfers the currency risk directly to the mother company in Germany. The big advantage of this is that the mother company has a good overview of the total inflow and outflow of each currency.