Real Business Case - How did BMW deal with exchange rate risk?
Although the dollar pushed to a new 11-year high against the euro recently due to a strong U.S. jobs report and market expectations for the Federal Reserve to raise interest rates midyear, the dollar was relatively weak four years ago as well as during the period of 2007 and 2008.
At that time, the strong euro has caused problems for European businesses, such as BMW, and made this car manufacturer lost half a billion dollars in 2007 due to the unfavorable exchange rate. Selling cars made in Europe to US customers is no longer profitable. So, BMW planned to expand its production in the US.
Please review the following Video and article, and answer the questions.
Made in Germany - BMW in the U.S. (Duration: 5:21)
The case study: How BMW dealt with exchange rate risk
by Xu Bin and Liu Ying
https://www.ft.com/intl/cms/s/0/f21b3a92-f907-11e1-8d92-00144feabdc0.html#axzz3TGOLzCAZ
Or click here to avoid the need to sign in to Financial Times The case study_ How BMW dealt with exchange rate risk - FT.pdf
QUESTIONS:
Discuss whether this is a good strategy for BMW to deal with exchange rate risk. What are the possible arguments in favor of and against the hedging strategy of BMW? If you are a manager or leader, what are alternative ways for BMW to hedge the exchange rate risk? Your answers are limited to no more than three paragraphs or one page (400-word page).
[Hint: You may also consider using various financial contracts and operational techniques.]