Bmw Strategy Case Study

BMW discovered the risk of the changes in the exchange rates which eroded the rising sales revenue by the company. The company recorded a loss of up to €2.4bn between 2005 and 2009 due to the exchange rates changes.  The company applied a hedging strategy to minimize the exposure to this risk. The company used the natural hedge strategy to offset the exposure to the aforementioned risks.  The strategy meant the development of ways to spend money in the same currency as where the sales were taking place.  With this strategy the revenues would also be realized in the local currency. In my opinion this is a good strategy since it included the making of purchases dominated in the currencies of its main market, this minimized to a greater extent the exposure to the exchange rate risks. Additionally, the strategy entailed the establishment of factories in the markets where the products were sold this mitigated the exchange rate risk. Additionally, this approach helped in the diversification of the exchange rate risks.

The arguments for this hedging strategy is that the approach is strong since it answered all the questions related to the exchange rate exposure. By moving production to foreign markets the company not only reduces its foreign exchange exposure but also benefits from being close to its customers. However, this strategy has its share of twists as the moving of the production to foreign markets led to exposure to other risks. These risks included the political and the economic risks in the foreign markets which could also trigger other losses. Even after natural hedges and secondary effects, most multinational corporations are exposed to some form of foreign-currency risk.

As a manager I would suggest more strategies to minimize the risk exposures further along with meeting the weaknesses showed by the natural hedging strategy. The first strategy is the use of future contracts. This will help minimize the exposure to the USD/EUR exchange rates, in this strategy the gains on the future contracts will be offset by the loss due to the appreciation in the Euro. The second strategy is the use of interest rate strategy. This will involve the use of interest swaps which involves the use of fixed rates of interest and floating rates payments. In this arrangement the changes in the interest rates that might result into changes in the currency exchange rates will be mitigated effectively.