Currency Through Pass at Porsche

Currency Pass-Through at Porsche Case

Porsche was found in 1931 and it is now a publicly traded company. Porsche currently has three different model lines which have different market characteristics. The three model lines are luxury sports car 911, competitively priced Boxter roadster, and SUV Cayenne. According to The Economist, on June 5 2003, "Porsche makes most of its cars in Germany, so its costs are mainly in Euro. Yet a large chunk of its revenues come from sales in America." This means that all of the direct costs in Porsche's manufacturing are incurred in euro-denominated operations (cost, markup, and basic pricing) and exported to other countries.

In 2003, Porsche introduced 911 4S Cabriolet, but was faced with growing pricing dilemma for all of its U.S sales. For example, when the price of 911 was 85,900 Euro in Europe, it was $93,200 in U.S. The U.S price was determined by Price in Euro multiplied by spot rate of $/Euro. The implied exchange rate was considerably stronger dollar than what was available on the open market at that time. Porsche experienced the exchange rate pass through (process of passing through all or part of exchange rate changes to the final customer in price- which is the percentage change in local currency import prices resulting from a one percent change in the exchange rate between the exporting and importing countries) and eventually hurt European producers as Euro continuously appreciated against dollar. In 2004, Porsche wanted to reevaluate its exchange rate strategy. "Porsche has the heaviest U.S exposure, yet it has the lowest level of natural hedging in the sector..." Porsche, Citigroup Smith Barney, September 24, 2003. Since Porsche has nearly half of sales in the U.S, it was most exposed to exchange rate changes against the dollar.

The possible hedging strategies for Porsche include natural hedge, exchange rate pass-through, currency swaps, forward contract, and put options. As the dollar continuously declined, Porsche chose to sell dollars at a fixed price. Currently, Porsche has been hedging dollars long position by estimating its annual sales and hedging that exposure by strategy of purchasing put options. This allowed Porsche to exchange or right to sell U.S dollars generated through U.S sales into Euros at specific exchange rates in the future. Porsche increased its put options hedge purchases throughout early 2003 and the sales revenues throughout the 2006 model year were 100% hedged. Porsche created a three year rolling portfolio of put options, which hedges expected dollar sales three years out into the future. As each year matures and the associated options expire, it is replaced with new three year option position.

The purchasing power of the U.S dollar customer for 911 has grown weaker between the months of July and December, from the exhibit 1 in the textbook. Because the spot rate for $/Euro has been