Foreign Exchange Exposure of BMW AG

This report discusses the foreign exchange exposure of BMW AG, including its risks and management strategies. It also provides suggestions for improving the management of foreign exchange exposure.

Running head: REPORT 0
FINANCE
JULY 4, 2019
STUDENT DETAILS:

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Contents
Introduction...........................................................................................................................................2
Foreign exchange exposure of BMW AG..............................................................................................2
Management of foreign exchange exposure of BMW AG.....................................................................4
Appropriate and inappropriate aspects of management of foreign exchange exposure of BMW AG....5
Suggestions for improvement in management of foreign exchange exposure of BMW AG..................6
Conclusion.............................................................................................................................................7
References.............................................................................................................................................8

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Introduction
The foreign exchange exposure is considered as risk or loss, which the international financial
transaction can take place because of the fluctuation in the currency. The foreign
exchange exposure is also considered as the exchange rate risk, foreign exchange risk as well
as the currency risk. The foreign exchange exposure defines a chance that value of
investment can reduce because of the changes in relative values of included exchanges. The
foreign exchange risk takes place while the corporation involves in financial transaction
denominated in the currencies excluding the currencies where the corporation is based. The
depreciation of the base currency, rise of base currency or appreciation of denominated
currency or devaluation of denominated currency would influence cash flow originating from
the transactions (Hoberg and Moon, 2017). The foreign exchange risk may also affect the
investors, who make trading in the foreign marketplaces, and business involved in the export
of products or services or import of the products and services to the different nations. In the
following report, meaning of foreign exchange exposure, foreign exchange exposure of
BMW AG, administration of foreign exchange exposure of BMW AG, various aspects of
management of foreign exchange exposure of BMW AG is discussed and critically
examined. The following parts also discuss the suggestions to improve the management of
foreign exchange exposure of company.
Foreign exchange exposure of BMW AG
Foreign exchange exposure is considered as a risk of the company, which commences at the
time of financial transactions in the international currencies. All currencies can experience
the time of high volatility that may adversely affect profit margins if suitable approaches are
not in the place to secure cash flow from unexpected fluctuation in the currency (Alford and
Lau, 2015).

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People all over the world are familiar with the auto manufacturer BMW. The company has
been building automobiles in Germany since 1916, after all. Over time, an organisation lost
the share of market in Germany, as well as by year 2011, less than 20% of BMWs sold were
sold in Germany. Since 2011, the company has perceived important development in
marketplaces such as India, Russia and China. Further, BMW manufactures the great
majority of the cars in Germany, and trades the larger quantity to the remaining world. BMW
faces the foreign exchange risks at great level. The multinational companies including BMW
are greatly influenced by the macroeconomic condition. The foreign exchange risk or
exposure is one of type of financial risk. In respect of foreign exchange risk, sale of cars
outside Euro-zone provides increment to the foreign exchange risk because of the changes in
exchange rate, particularly between British Pound, Japanese Yen and US dollars (Zhao and
Huchzermeier, 2018).
The International financial disaster as well as the effects change on raw materials
marketplaces in foreign and the currency exchange rates on financial, good, and service
marketplaces have substantial influence on the revenue and earning of the multinational
companies. To get positive outcomes, significance level of business in the upcoming period
and profitability, the BMW Group knows that this should uncover itself to the level of
measures risks. According to the latest quarterly statement to the shareholders, it is
recognised by BMW Group that the management of the risk is basic precondition for being
capable to handle with cash flow of change in related legal, financial, political, and technical
background. The annual report of company covers the topic of risk in relation to sales
obligations, pension obligations, obligations in relation to the raw materials and other detailed
elements of business. It is stated by company that in the discussion of BMW’s Group, the
company will make focus on the financial risks and that related to the foreign risk
management.

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Management of foreign exchange exposure of BMW AG
This is claimed by BMW Group that the risks should be managed at two various levels.
These levels are strategic level (long-term and medium) and operating level (medium-term as
well as short-term). For the long-term risks and medium-term risk, the foreign exchange risk
is managed through the natural hedging or through enhancing the purchase volume
denominated in the foreign currency or enhancing the size of domestic manufacturing. The
illustration of strategic exposure justification in this framework of may be the opening of new
plants in South Carolina for reducing the foreign exchange risk in the main sale marketplace.
In the addition of this, in respect of medium-term risks and short-term risks, the hedging
transaction took place with the financial partners of the outstanding credit standing for
mitigating the operating risks. It is stated in the annual statement of the company that the
company only uses the derivative financial tools for hedging. The company uses this tool to
decrease the currencies, rate of interest, fair value, market price risk from the operating
functions and the relevant financial needs. The company runs under IFRs that needs the
derivate financial instruments such as currency swap, forward contract related to the
commodities and forward currencies to be assessed by the fair value, irrespective of purpose
for that these are detained (Bhasin and Nisa, 2019).
In the end of 2012, the company held derivative instrument with term up to twenty-five
months for hedging the interest rate arising upon the financial instruments with variable
payment of interest over projected 2 years. The company also possesses the derivative
instruments with period up to sixty months for hedging the risk of price of raw material
related to the transaction in upcoming five years. In last, the company possesses the
derivatives tools with a period up to seventy-two months for hedging the risk related to
currency related to the transactions of the upcoming period. As mentioned in the last
segment, the debt ratio of company is altered to get what the company realizes is its optimal

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capital structure. The significant feature of the risk management as this is related to the
capital structure is cautious choice of the fiscal tools with a purpose of getting toning
maturity for the needs of financial obligations such as debts. The company appears to ensure
the best job of timing the payment as well as handling the risk connected with the payment to
ensure it may share the load of seventy billion Euro in financial liabilities (Longinidis,
Georgiadis and Kozanidis, 2015).
Further, in stating the issues related to the foreign exchange exposure, BMW Group adopted
two real-time ways for decreasing the exposure. The company uses the best strategy that is
known as the natural hedge. The natural hedge is the as well as straightforward simple way to
reduce the risks. The reason is that this is not so difficult. This strategy is less risky as well as
less costly. It is also the less time-intensive for applying. For this company, the natural hedge
was for decreasing the exposure through focused on the manufacturing in a place with the
great sales.
For accomplishing this, BMW Group moved the manufacturing to the geographical fields
wherever the sale was the healthiest. All at once, BMW Group shifted the approaches or
practices related to the purchase. In place of utilising the foreign dealers, the corporation
targeted to the buying practices far away. It decreased the number of time, which currency
exchange was needed to make the business. In the different terms, the natural hedging
strategy of BMW Group was to make, buy, and sell in the similar geographic area utilising
the local currencies.
Appropriate and inappropriate aspects of management of foreign exchange exposure of
BMW AG
There can be appropriate aspects and inappropriate aspects of the foreign exchange risk of
BMW AG. The appropriate aspect of management of the foreign exchange exposure is that

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this is a potential influence of the opposing exchange rate fluctuation upon the cash flow of
the company as well as the competitive place. It will be helpful in determining the financial
position of the country and hence well-being of all the persons living in this. The
inappropriate aspect of foreign exchange exposure of BMW AG is that all the currencies may
experience the time of higher volatility that may badly affect the margin of profits if
appropriate approaches are not in the place for securing the cash flow from
unexpected currency’s fluctuation (Amberg and Friberg, 2016).
In this way, other response is to force the other people for taking the risk of foreign exchange
by denominating the transactions in the local currency (BMW Group). This strategy ends the
direct foreign exchange risk, however adds various risks related to the operations, and the law
of unintentional concerns would prevail imposing risks on to the customers is not very
business friendly (Hutson, Laing and Ye, 2018).
Suggestions for improvement in management of foreign exchange exposure of BMW AG
BMW Group had to search the manner to state the currency exchange exposure without
passing on the costs to the customer. It is suggested to the BMW Group that the company
should protect the cash flow as well as the profit margin in better way. The company should
improve the financial projection. It is required to develop the detailed knowledge as well as
understanding that how foreign exchange fluctuation influence the balance sheet. It is also
recommended that the company should enhanced the capacity to borrow. The company
should lead to faster development and the solid competitive advantages (Bénétrix, Lane and
Shambaugh, 2015).
In the addition of this, BMW Group may ignore the exposure through only running in the
local marketplace. For BMW Group choosing the financial instruments for hedging the
exposure, it is required to remember that not all the financial institutions as well as banks

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render the similar services (Boudt, et. al, 2019). The best-hedging provider are required to
carry out the complete review of a corporation to evaluate the exposure, help to set up the
formal approach, and render the bundled pack of the services, which state all the steps in a
procedure. Eventually, the foreign exchange is just a risk included for the corporation
operating outside its domestic market. It is necessarily required by the company to consider
how to make deal with the risk. It is required by the company to hope for the best as well as
depending upon the stable financial marketplaces hardly works. Just ask the holidaymaker
faced with occurring twenty per cent more than predictable for the food and coffee due to
unanticipated exchange rate measurement (Hsiao, 2017).
Conclusion
As per above analysis, it can be concluded that the BMW Group is becoming better in
management of the transaction exposure and international risks related to the operations. It is
also clear form the annual statement of BMW group that the company have made the perfect
job recognising future risks and fixed controls and procedure to secure itself. It can say that if
the company will continue to develop the parts in Asia as well as America, then it will be
easy to develop itself as the international producer of the quality cars as stated as the mission.
The administrative risk that company identifies and should continue to avoid is utilising the
derivative financial instruments for projected trading in place of the prevention of loss. In a
case when the company can keep the brand in Europe, continue to develop in the segments in
Asia and America, and continue to utilise the hedging as well as derivative tools
conventionally as the risk mitigation tool, it would understand constant achievement as well
as positive development with strong future earning and increasingly increasing price of stock.

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References
Alford, A.W. and Lau, A.W. (2015) A foreign investor’s guide to accessing the Chinese
equity market. The Journal of Portfolio Management, 41(5), pp.31-40.
Amberg, N. and Friberg, R. (2016) Three Approaches to Risk Management—and How and
Why Swedish Companies Use Them. Journal of Applied Corporate Finance, 28(1), pp.86-
94.
Bénétrix, A.S., Lane, P.R. and Shambaugh, J.C. (2015) International currency exposures,
valuation effects and the global financial crisis. Journal of International Economics, 96,
pp.S98-S109.
Bhasin, K. and Nisa, S. (2019) Economic Exposure Management: A Review. IUP Journal of
Financial Risk Management, 16(1).
Boudt, K., Neely, C.J., Sercu, P. and Wauters, M. (2019) The response of multinationals’
foreign exchange rate exposure to macroeconomic news. Journal of International Money and
Finance, 94, pp.32-47
Hoberg, G. and Moon, S.K. (2017) Offshore activities and financial vs operational
hedging. Journal of Financial Economics, 125(2), pp.217-244.
Hsiao, C.M. (2017) Enterprise risk management with foreign exchange exposures: Evidence
from Taiwan tourism industry. Asian Economic and Financial Review, 7(9), pp.882-906.

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Hutson, E., Laing, E. and Ye, M. (2018) Mutual fund ownership and foreign exchange risk in
Chinese firms. Journal of International Financial Markets, Institutions and Money, 25(8), pp.
250-264
Longinidis, P., Georgiadis, M.C. and Kozanidis, G. (2015) Integrating operational hedging of
exchange rate risk in the optimal design of global supply chain networks. Industrial &
Engineering Chemistry Research, 54(24), pp.6311-6325.
Zhao, L. and Huchzermeier, A. (2018) Capital Structure and Financial Risk Management.
In Supply Chain Finance, 25(5), pp. 21-38

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