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Discuss whether this is a good strategy for BMW to deal with exchange rate risk. What are the possible arguments in favor of and against the hedging strategy of BMW? If you are a manager or leader, what are alternative ways for BMW to hedge the exchange rate risk and to deal with the tariff issues? Your answers are limited to no more than fifteen sentences.
[Hint: You may also consider using various financial contracts and operational techniques.]
Euro had rapidly strengthened and hit multi-year highs against the dollar and the pound in the first quarter 2018. Late 2017, European Central Bank (ECB) had issued terrifying warning that Euro is too strong and could plunge EU economy back into crisis. The dollar was relatively weak three years ago as well as during the period of 2007 and 2008.
The strong euro has caused problems for European businesses, such as BMW, and made this car manufacturer lost half a billion dollars in 2007 due to the unfavorable exchange rate. Selling cars made in Europe to US customers is no longer profitable. So, BMW planned to expand its production in the US.
Many foreign car makers are considering shifting more of their manufacturing to North America due to the recent threatening new tariffs from President Trump’s tough approach to trade. However, BMW’s South Carolina plant exports more than two thirds of the 400,000 vehicles it has produced annually, mostly to China, and China already imposed an additional 25 percent charge on vehicles from the U.S.