Reference no: EM13909133

Based in Germany, and with manufacturing and assembly exclusively located in Germany, Porsche’s entire cost base is the euro or slovakian koruna (which is managed by the slovakian government to maintain stability against the euro). This means that all of the direct costs in its automobile manufacturing are incurred (for practise purpose) in euro denominated operations (cost, mark-up, and basic pricing). Porsche's products are then exported to its major markets around the world, including the US, the UK, .. Exhibit 1 illustrates a possible scenario of the European cost and market pricing for the North American launch of the porsche 911 4s cabriolet in 2003 ( a 3.6-liter six cyclinder engine with a top track speed of 147mph; 0 to 62 mph in 5.3 seconds). Assuming that Porsche first established the price of the car in euros, and then - in April 2003 - set the U.S. dollar price at the then current exchange rate of $1.0862.. As illustrated in the exhibit, in the months following the price-setting, the company’s margin would have been largely eliminated as a result of the continued appreciation of the euro versus the dollar. The analysis highlights the squeeze suffered by a European producer exporting to the US dollar markets. Independent of what method, degree, or effectiveness of hedging was undertaken by Porsche, the company is faced with a continuing pricing dilemma for all of its North American sales.

1. In the long run, what do most automobile manufactures do to avoid these large exchange rate squeezes?