Porsche relies on currency hedging rather than price increases to boost pretax profits on sales of its automobiles. What is the advantage of doing this, and how does hedging work?
What will be an ideal response?
Hedging exchange rate exposure involves establishing an offsetting currency position such that the loss or gain of one currency position is offset by a corresponding gain or loss in some other currency. Porsche manufactures all of its cars in Europe but generates about 45% of its sales in the United States. It therefore faces economic exposure stemming from the relative value of the dollar compared to the euro. Thus, Porsche is considered to be fully hedged, which means it takes currency positions to protect all earnings from foreign-exchange movements.
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