Explain how Volkswagen’s failure to fully protect itself against foreign exchange fluctuations had a negative effect on the company. What can Volkswagen and other companies learn from this experience?
Global companies must interact with the foreign exchange market, which is the market for converting currencies from one country to another. Due to the fluctuation, there are different things companies can do to be able to insure or also known as a hedge against the risk of these fluctuations. One of those ways to reduce risk is to forward and the exchange rate which means to govern foreign exchange rates for future transactions. This insurance is for the possibility that when there is fluctuation in the future market when a transaction may be unprofitable. In the past, Volkswagen had traditionally hedged 70% of its foreign currency exposure, but in 2003 they decided to only hedge 30%. In 2003, when the value of the euro increased making the euro of 1 equal to $1.25, this had a major negative impact on Volkswagen. If Volkswagen would have hedged with a forward contract it could have possibly had one euro equal one dollar exchange rate. Now if the value had declined in the euro, hedging could have possibly cost the company profits as well. But as a penalty from not the company lost billions in their operating profits. Volkswagen and other global companies need to be very aware of the exchange rate as they can change in seconds and potentially be very devastating to their company. If your company I highly dependent on foreign currencies it is important to take the correct measures. Now for Volkswagen, they hedge 70% but other companies may need to hedge more or less depending on their risk analysis. Companies can take away though that is very important to mitigate risk as much as possible with still being profitable.
IsraTransfer Team. (2017). How Exchange Rate Fluctuations Affect International Businesses (and Ways to Protect Yourself). Retrieved from: https://isratransfer.com/blog/how-exchange-rate-fluctuations-affect-international-businesses-and-ways-to-protect-yourself/
Hill, C. W. L., & Hult, G. T. M. (2016). Global Business Today. New York, NY: McGraw-Hill Education
by EssayRoyal, Dec. 10, 2019, 5:51 p.m.