BMW and Global Financial Risk

Essay by dboylesA, October 2008

download word file, 4 pages 3.0

In recent years, the value of the U.S. dollar has experienced historical highs followed by a dramatic decline against the currencies of America's major trading partners, a trend likely to continue. Meanwhile, many U.S. companies have moved substantial portions of their operations overseas in order to lower costs and improve profitability. With revenues denominated in U.S. dollars and costs denominated in other currencies, any long-term decline of the U.S. dollar poses a significant risk to profits, competitive positions, cash flows, and ultimately share value. In particular, the significant role of China in many corporate supply chains and the potential appreciation of the Chinese currency together pose a high degree of risk to U.S. importers. Financial hedging tools are typically insufficient or too expensive to address large and long-term exchange rate shifts. To effectively manage long-term exchange rate risks, companies should consider "operational hedging" strategies in addition to traditional and widely used financial hedging models.

Operational hedging - a strategy designed to manage risks through operational means - provides companies with flexibility in their supply chains, financial positions, distribution patterns and market-facing activities by allowing dynamic adjustments in the locations used to manufacture, source, and sell. When deployed carefully, such flexibility can help to reduce the impact of large and long-term shifts in currency values on costs and revenues. Before a company can construct effective operational hedging strategies, it must complete a comprehensive assessment of currency exposure across its supply chain. This is where BMW has excelled. Realizing where their most profitability areas are, and what product sells in those locations.

BMW is one of the most respected automotive companies in the world. It has come a long way though, about 60 years ago, its primary market (aero engines) and capital equipment were both in ruins. Even when Germany was in...