CRITICALLY ANALYSIS OF BMW AND BY LUFTHANSA

Critically Analysis of BMW and by Lufthansa



Table of Content

Critical Analysis3

German Companies Lufthansa and BMW6

BMW6

Lufthansa7

Theoretical understanding8

Risk Management9

Foreign Exchange Risk10

Classification of Foreign Exchange Risk11

Transaction Exposure11

Translation Exposure12

Operating Exposure12

Strategic Analysis13

Exchange Rate Risks Management: Hedging Strategies13

Financial Derivative Instruments14

Currency option15

Foreign exchange Forwards15

Currency Futures16

Currency Swaps16

The theoretical and empirical model for Companies17

The firm17

Currency movements18

Oil price Movements19

GDP Movements20

Stock Market Index Movements20

APT Model and regression analysis21

Exchange rate22

Market Index return23

GDP23

Marketing Strategies24

References27

Critically Analysis of BMW and by Lufthansa

Critical Analysis

Recently, both company executives as well as national media have claimed that short currency exchange rate fluctuations are negatively affecting the stock returns of certain firms. However, most previous studies focusing on companies in the US and Asia have been unable to find empirical support for a statistically significant linkage between firm value and exchange rate risk. By using a quantitative method with a deductive approach, the present research investigates if currency exchange rate movements impact the stock return of European based car companies with market interests in the US. In addition, we included three macroeconomic factors: GDP, stock market index and Oil price to perform a multiple regression analysis. In consistency with the earlier studies, our results indicate that for five out of the six investigated companies, short movements in the three exchange rates do not significantly affect the stock returns of the companies investigated. By analyzing the annual report of the investigated companies, we found that derivatives instruments such as currency option, foreign exchange forwards, currency futures and currency swaps were used to hedge exchange risk (Jorion, 1990, 331).

This might be one of the reasons why it was difficult to capture exchange rate risk. The fact that BMW was the only company showing a significant effect could indicate that the company is not applying the accurate hedging strategy. Another reason might be that the company is more exposed to exchange risk due to its large exporting activity compared to the other investigated companies. The purpose is to assess the currency risk for French, German and Swedish automotive companies' stock returns due to exchange rate fluctuations. This is achieved by analyzing the impact of exchange rate volatility on companies' stock returns. Also, we want to illustrate it is possible to hedged short exchange rate fluctuations to avoid big impacts on the company's stock returns by using financial derivatives. The results demonstrate that firms could benefit from exchange rate fluctuation, a depreciation of the Dutch guilder relative to a trade-weighted currency index (period: 1994-1998). Two variables, firm size and the foreign sales ratio, were proven to have a significant and positive linkage with exchange rate exposure. Fang and Miller (2002) studied the impact of daily currency depreciation on Korean Stock market return in the period of 1997 to 2000.

Their results provided evidence that currency depreciation has a significant impact on stock market returns. The findings are illustrated in three ways including the level of exchange rate depreciation, which has a negative impact on stock market returns; exchange rate depreciation volatility which has a positive impact on ...