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      10-27-2007, 10:30 PM   #18
Seth_Horwitz
Tired of feather footed //M drivers
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Drives: 330ci, 911 Turbo X50
Join Date: Oct 2007
Location: New York City

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This shouldn't be much of an issue (I really hope)

Any respectable international manufacturer will take steps to hedge against exchange risk by transacting in futures contracts, or entering into currency swaps. As the U.S. is a major market for BMW (I don't want to make up numbers, but I think it's around 50%), they undoubtedly have hedged against a weakening dollar. It would be irresponsible not to.

Whereas the above calculations are valid (I assume, I haven't verified) they don't have the exact impact on BMW's bottom line that it would seem. While the profit of each car goes down as the dollar weakens, the fact that BMW is certainly short the dollar in a hedge means that a financial institution will owe BMW a cash payment that only increases with such moves. Ideally, the hedge will exactly offset any direct losses from dollar movements. (This isn't the case, but I'm sure BMW has got it pretty close after all of these years.)

To sum things up, if the dollar weakens, BMW is making less off of "you" but by an amount that should be closely offset by an inflow of cash from their hedge's counterparty. (Net gain/loss to BMW = $0) Conversely, if the dollar strengthens, they will make more money off of "you", but have to pay out a similar amount to the counterparty.

It's late, so that may not read very clearly, but, to sum things up, BMW has "locked in" their profit margins based on projected sales, by making a currency hedge, and actively adjusting it. This enables them to have a steady income stream over time, and not have their cars get wildly cheaper or more expensive over time.
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