Cases in International Finance
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Transcript of Cases in International Finance
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8/9/2019 Cases in International Finance
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Case #1: Lufthansa
If Karl Marx could see what the foreign exchangemarket is doing to captains of industrya successful
corporate executive of one of the worlds prestige
airlines can put on a multimillion dollar currency
speculation and win and still get lambasted by the
critics. Its enough to make a capitalist cry!
Intermarket, 1985
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Some interesting Facts
1926: Lufthansa was born throughthe mergerof Deutsche Aero Lloydand Junkers Luftverkehr it inheritsits crane logo from DAL
1934: Lufthansa offers its firsttransatlantic flight
1990: Lufthansa resumes flights toBerlin following German unification
1990: Lufthansa joins the star alliancewith Air Canada, SAS, Thai Airlines andUnited Airways the first multinationalairline grouping
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Lufthansa Today
Lufthansa is the national carrierof Germany headed by Wolfgang Mayrhuber (since 2003)
Revenue (2004): E 17B
Net Income (2004): E 383M
Passengers (2004): 50.9M
Load Factor (2004): 74%
Lufthansa has 253 aircraft with an average age of 10.5 years.
Boeing: 40%
Airbus: 60%
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In January 1985, under the Chairmanship of Heinz Ruhnau,Lufthansa purchased twenty 737 jets from Boeing for $25,000,000apiece ($500M Total)
Length: 100 Feet
Wingspan: 86 Feet
Cruising Speed: 470 MPH
Max Altitude: 35,000 Feet
Range: 1000 Miles
Seats: 123
At the time, the exchange rate was DM 3.20 perdollar. At thisrate, the planes would cost Lufthansa DM1.6B
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1.7
1.9
2.1
2.3
2.5
2.7
2.9
3.1
3.3
DM/$
1/1/1981 1/1/1982 1/1/1983 1/1/1984 1/1/198
Over the previous year, the dollar had been appreciating againstthe Deutschmark..
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Lufthansas Options
Option #1: Remain Uncovered
The riskiest option with the greatest potential gain (if the dollarweakens against the Deutschmark) and the greatest potential cost (if thedollar strengthens).
Option #2: Full Forward Hedge
The safest of the options. If Lufthansa bought dollars forward atthe current rate of 3.2, they could lock in a cost of DM1.6B
Option #3: Option Hedge
If Lufthansa purchased put option on DM at 3.20 DM/$ (or calloptions on dollars), they could take advantage of the potential gain froma dollardepreciation, but still hedge the possible appreciation risk
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Lufthansas Options
Option #4: Money Market Hedge
Lufthansa couldobtain dollars now, by borrowing Deutschmarks,converting them todollars at DM 3.20 and then depositing them in either aUS bank or a Eurodollar account until needed. In principle, this shouldhave the same effect as the forward hedge
Option #5: Partial Hedge
Lufthansa could purchase $250 M dollars forward at DM 3.20 atallow the remaining balance to be un-hedged.
Option #6: Cash Flow Matching
Lufthansa could try and generate $500M in ticket sales in the US very unlikely!
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Lufthansas Options
1
1.2
1.4
1.6
1.8
2
2.2
2.2 2.4 2.6 2.8 3 3.2 3.4 3.6 3.8 4
Cost(BillionsD
M
Uncovered
Full Forward
Partial Hedge
Option Hedge
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1.5
1.7
1.9
2.1
2.3
2.5
2.7
2.9
3.1
3.3
3.5
1/1/85 5/1/85 9/1/85 1/1/86 5/1/86 9/1/86 1/1/87 5/1/87 9/1/87
Ruhnau was convinced that the dollar was going to fall andopted forthe partial hedge. He was proved right as the dollar plummeted in themid eighties.
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Did Ruhnau make the right decision?
Alternative Relevant Rate Total Cost
Uncovered DM 2.30 DM 1.150 B
Put Options DM 2.30 + Premium DM 1.246 B
Partial Hedge .5(2.30) + .5(3.20) DM 1.375 B
Full Forward DM 3.20 DM 1.6 B
While Ruhnau was correct on the direction of the dollar, he could
have saved some money using options rather than a partial hedge!
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Case #1: Porsche
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.
The Economist, June 5, 2003
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Some interesting Facts
Porsche was founded in 1931 byFerdinand Porsche, a formerDaimler Benz director.
One of the firstPorsche modelslookfamiliar?
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Some interesting Facts
The first real Porsche designedin 1948
September 30, 1955:James Dean is killed
driving his Porsche550 Spyder
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Porsche Today
Porsche is led by President and CEO Dr.Wendelin Wiedeking (since 1993)
Net Sales (2003): E 5.582B
Net Income (2003): E 565M
EPS(2003): E 32.29
EPS Growth (2003): 22%
Porsche is essentially a privately held company. All 8.75M votingshares are held by the Porsche family. The remaining 8.75M non-voting shares are primarily held by institutional investors
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The Jewel in the Porsche Crown has always been the 911 Series.(14 different 911 models currently)
Porsche 911 Carrera
Engine: 3.6l 6 Cylinder Engine
Power: 325 Hp @ 6,800 RPM
Acceleration: 0-60 in 4.8 Sec.
Top Speed: 177 Mph
Units Sold (2003): 27,789
Average Price: E 92,000
Cost: E 78,000
Profit Margin: 16%
The 911 commands almostexclusive ownership of its market
segment (high end sports cars).While sales are cyclical, priceelasticity is very low.
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The Boxster was introduced in 1996 to compete with the lowersend sport scars alreadyon the market.
Porsche Boxster
Engine: 2.7l 6 Cylinder Engine
Power: 240 Hp @ 6,400 RPM
Acceleration: 0-60 in 5.9 Sec.
Top Speed: 160 Mph
Units Sold (2003): 18,411
Average Price: E 44,000
Cost: E 41,000
Profit Margin: 8%
The Boxster is less cyclical thanthe 911, but much more price
sensitive particularly sinceintroduction of the BMW Z4 in2003
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Porsche recently gained entry into the lucrative SUV market. FuelledbySUV crazy Americans, the launch of the Cayenne in 2002 has beenhailed as one of the most successful produce launches in history
Porsche Cayenne
Engine: 3.2l 6 Cylinder Engine
Power: 247 Hp @ 6,000 RPM
Acceleration: 0-60 in 8.5 Sec.
Top Speed: 133 Mph
Units Sold (2003): 20,603
Average Price: E 68,000
Cost: E 61,000
Profit Margin: 10%
The Cayenne is clearly at the highend forSUVs Porsche is quickly
moving todevelop a lowerpowered, lower cost version.
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Porsches Growing Sales
0
10000
20000
30000
40000
50000
60000
1994 1995 1996 1997 1998 1999 2000 2001 2002
Cayenne
Boxster
911
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Porsches Competitive Position
Automaker Sales(Billions)
Revenue(PerVehicle)
Margin Debt (%ofAssets)
ROIC
Audi E 22.6 E 27,000 6.6% .2% NA
BMW E 42.3 E 32,211 8.0% 47.5% 11.3%
Fiat E 58.2 E 25,829 1.6% 31.3% -2.9%Mercedes E 50.2 E 39,000 6.4% NA NA
Peugeot E 54.4 E 16,192 5.3% 42.9% 10.5%
Porsche E 5.6 E 72,889 16.4% 6.4% 20.5%
Renault E 36.3 E 14,250 4.1% 47.6% 3.7%
Volkswagen E 86.9 E 13,583 5.2% 42.4% 6.8%
We learned the hard way that banks are never there when youneed them : Porsches anti-debt philosophy
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Porsches Foreign Exchange Exposure
United Kingdom UnitedStatesAutomaker Sales Pr oduction Sales Production
BMW 11% 15% 26% 11%
Fiat 6% 0% 0% 0%
Mercedes 9% 0% 19% 7%
Peugeot 12% 6% 0% 0%
Porsche 11% 0% 42% 0%
Renault 9% 0% 1% 1%
Volkswagen 7% 0% 13% 7%
Porsche has the heaviest US exposure (and this is increasing), yet it
has the lowest rate of natural hedging in the sector (Citigroup)
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Pricing Pressures
Porsches Newest Model, the 911 Carrera 4s Cabriolet (2003)waspriced in continental Europe at E 85,000 (a 15% markup over cost of$72,000). Simultaneously, the new Cabriolet was introduced in theUS for $93,000
Implied Exchange Rate =$ 93,000
E 85,000
=1.09 $/E (.91 E/$)
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EUR/USD
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Porsches Problem Defined:
Porsche has three model lineswith different marketcharacteristics 45% ofPorsches sales are in the US($1.836B peryear)
With the exception of anassembly plant in Finland (also aEuro country), all Porsches aremanufactured in Germany
As the dollar continues todecline, what options does Porschehave to cover its currency exposure?
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What did Porsche Actually Do?
Porsche chose an aggressive strategyof put options on dollars(i.e. contracts to sell dollars at a fixed price). Porsche maintains a3 year rolling portfolioof put options with strike prices basedoncurrency forecasts. - Sales revenues through model year 2006 arecompletely hedged.
Currency Exposure Covered by Derivative Instruments
BMW: 35%
Mercedes: 30%
Porsche: 100%
Volkswagen: 30%
Is this the best strategy?