#REAL OPTIONS VALUATION RISK CASE STUDY FULL#

When the rate falls below the equilibrium range i.e. The difference between the equilibrium rate and spot rate are then evaluated for evaluating the exposure. The model mainly focused on long-term hedges usually for six years. This model shows that an equilibrium rate, for all major currencies that BMW deals with, indicating their over or undervaluation. Secondly, BMW uses an internally developed model, which it used to plan foreign exchange hedging. Company has issued instructions and risk figures for its global network, while all of its local treasury centers were to review the exposure on weekly basis which is then evaluated at the central treasury department. Considering the current hedging strategy in detail.įirstly, it uses natural hedging through which the company tries to match the currency of its operating revenues with its operating expenses in order to cancel out any exchange rate effects to some extent. The current hedging strategy of BMW is more like natural hedging strategy. Although the sales are high enough to cover the high costs of the company but still the deterioration of foreign currency ratios are exerting pressure on the financial results of the company. In order to evaluate these exposures, the complete analysis of transactions related to sales and manufacturing operations need to be considered. These transactions give rise to transaction exposure where the transactions are exposed to exchange rate risks. are then converted into euros as a base currency. The revenue generated from these countries in currencies such as Japanese Yen, US dollars, etc. Moreover, its operations are in almost all of the major countries around the world where its sales subsidiaries are located. therefore the company’s expenses are in foreign currency and for which it is subjected to exchange rate fluctuations, which will determine the operating exposure to BMW. Since the company is buying raw materials for its production from different countries like Japan, etc. The company’s goal was to rekindle its existing models in these brands.Įvaluation of BMW’s transaction and operating exposureĭue to external factors affecting negatively, such as, the ongoing weakening of US dollar and currencies like, yen in which the company is operating is leading to high cost of raw materials. Company also bought the UK based company Rover, through which it acquired the brands like, Land Rover, MINI, and GM. It also acquired various companies in international destinations such as the United Kingdom and Germany.

It also diversifies into international operations due to which its exploits opportunities through selling in International markets.

#REAL OPTIONS VALUATION RISK CASE STUDY FULL#

In addition to that, it also provides financial services through leasing and loans, providing as an option for those customers, who cannot afford to make Full payments on immediate basis. The BMW group was a Multinational organization, started by Karl Rapp in 1913 and was involved in the manufacturing of range Automobile Cars and Motorcycles that grew in subsequent years of operations.

Real options valuation risk case study